7.6.3—Barriers to entry/exit

A barrier to entry raises the cost or difficulty of a new firm entering; a barrier to exit makes it costly to leave. Legal protection, sunk costs, economies of scale, brand loyalty, network effects and strategic behaviour can all matter.

A barrier is economically relevant only if it changes the feasible choices of potential entrants or incumbents. Sunk costs are especially important because they cannot be recovered on exit.

A patent can delay imitation; a large network becomes more useful as users join; specialised machinery with little resale value can make exit costly even when current profits are low.

A large start-up cost is not automatically an insurmountable barrier, and economies of scale can be a barrier only when the minimum efficient scale is large relative to market demand.