JenBarros

Implications

Due to the inability to exit the market without suffering loss, firms choose to stay in a market. This inability to leave the market leads to increased competition within that market. This negatively affects all firms in the market and profits may be lower than in a perfectly competitive market.

Example

Barriers to exit are especially high in the airline industry. Airplanes are specialized assets, used only by the airline industry. Demand for airline travel due drastically decreases, due to Covid-19. However, most airline companies could not exit the industry due to the the inability to offload these major specialized assets. Therefore, many airline companies operated at low profit or at a profit loss.