Barrier to Entry or Exit

Barriers to entry refer to factors that make it difficult for a firm to enter a market. These may include such obvious factors as the cost of initial investments (including capital investments, research and development, and advertising) required to enter a market or the difficulty of overcoming customer loyalty to firms already in the market. Government regulation, for example the establishment of a state-endorsed monopoly or restrictions on international trade, may also serve as a barrier to entry. Intellectual property rights, including patents and copyright, may also make entry to a market difficult.

Barriers to exit refer to those factors that make it difficult for a firm to leave a market. These may include the loss of fixed assets (assets which can’t easily be transferred elsewhere, such as a factory) and closure costs, including severance pay and settlements with subcontractors. Perhaps the least certain cost of exit is the possibility of an upturn in the market. If an upturn seems likely or is at least possible, the firm must calculate the potential of lost earnings as part of its calculations when determining the cost effectiveness of leaving a market.