What are the main sources of entry barriers and exit costs in an industry?

2 Exit costs

Exit costs are expenses or losses that a firm incurs when it decides to leave an industry or a market. They can be fixed, variable, or sunk. Fixed exit costs are independent of the level of output or sales, such as lease contracts, severance payments, or environmental cleanup. Variable exit costs depend on the level of output or sales, such as inventory disposal, customer refunds, or supplier penalties. Sunk exit costs are irreversible and cannot be recovered, such as research and development, brand equity, or specialized assets.

3 Market structure

Market structure refers to the number and size of firms in an industry or a market, and the degree of competition among them. Entry barriers and exit costs affect the market structure by influencing the potential and actual entry and exit of firms. High entry barriers and low exit costs tend to create concentrated markets with few dominant firms and high profits, such as monopoly or oligopoly. Low entry barriers and high exit costs tend to create fragmented markets with many small firms and low profits, such as perfect competition or monopolistic competition.

4 Market performance

Market performance refers to the outcomes and efficiency of an industry or a market, such as prices, output, quality, innovation, and social welfare. Entry barriers and exit costs affect the market performance by influencing the behavior and strategies of firms. High entry barriers and low exit costs tend to reduce the competitive pressure and increase the market power of incumbent firms, leading to higher prices, lower output, lower quality, less innovation, and lower social welfare. Low entry barriers and high exit costs tend to increase the competitive pressure and reduce the market power of incumbent firms, leading to lower prices, higher output, higher quality, more innovation, and higher social welfare.

5 Policy implications

Policy implications are the effects and consequences of government interventions in an industry or a market, such as taxes, subsidies, regulations, or antitrust laws. Entry barriers and exit costs affect the policy implications by influencing the objectives and tools of government policies. High entry barriers and low exit costs tend to justify government policies that aim to promote competition and consumer protection, such as breaking up monopolies, preventing collusion, or regulating prices. Low entry barriers and high exit costs tend to justify government policies that aim to support entry and exit, such as providing incentives, reducing taxes, or facilitating restructuring.

6 Practical examples

Practical examples can provide insight into entry barriers and exit costs in an industry or a market. For instance, the pharmaceutical industry has high entry barriers due to patents, research and development, and regulatory approval, yet low exit costs due to generic competition and product obsolescence. This leads to high profits and innovation, but also high prices and social concerns. On the other hand, the airline industry has low entry barriers due to deregulation, low fares, and online booking, but high exit costs due to fixed assets, labor contracts, and debt obligations. This leads to low profits and frequent bankruptcies, yet low prices and consumer choice. The restaurant industry is somewhere in the middle with moderate entry barriers due to location, capital, and reputation as well as moderate exit costs due to leases, equipment, and inventory. This leads to moderate profits and differentiation but also high risk and uncertainty.