Which of the following statements is correct regarding exit barriers and market rivalry?

• A. High exit barriers tend to increase the intensity of rivalry among firms.
• B. Low exit barriers tend to increase the intensity of rivalry among firms.
• C. High exit barriers tend to decrease the intensity of rivalry among firms.
• D. Exit barriers have no effect on the intensity of rivalry among firms.

Answer: (A)

Verified step by step guidance

1. Understand the concept of exit barriers: Exit barriers are obstacles that make it difficult or costly for a firm to leave an industry. These can include specialized assets, fixed costs of exit, emotional or strategic reasons, or legal constraints.
2. Recognize how exit barriers affect firm behavior: When exit barriers are high, firms are reluctant to leave the market even if they are earning low or negative profits, because leaving would involve significant costs or losses.
3. Analyze the impact on market rivalry: Since firms cannot easily exit, they tend to compete more aggressively to maintain their market share and cover their fixed costs, which increases the intensity of rivalry among existing firms.
4. Contrast with low exit barriers: If exit barriers are low, firms can leave the market more easily when profits are low, reducing the number of competitors and thus potentially lowering the intensity of rivalry.
5. Conclude that the correct statement is: High exit barriers tend to increase the intensity of rivalry among firms, because firms remain in the market and compete fiercely rather than exiting.