Lower Entry Barriers: Used Machinery and Small-Firm Formation

Economic Principle: Sunk Costs, Fixed Costs & Market Entry

One of the most substantial changes in manufacturing, construction, logistics, and light industrial services in the last few years is the emergence of a thick and liquid secondary market for capital equipment. From CNC mills to forklifts, from textile machines to a used generator set, industrial assets that used to require significant upfront investment can now be obtained for a fraction of their original cost. This change is not only significant from an efficiency standpoint; it is changing the economics of who can start a business in the first place.

At the center of this change is the classic economic distinction between sunk costs and fixed costs. New machinery produces both: the firm must pay a large upfront purchase price and much of that price will not be recovered if the business fails. However, the growing availability of used equipment turns sunk costs into something close to a recoverable investment, significantly lowering the barriers to entry for small and micro-firms.

Reduced Fixed Costs and Greater Entrepreneurial Potential

In earlier eras, capital-heavy businesses tended to be dominated by established firms unable to invest in the fixed cost of machinery to be competitive. A new CNC machine might cost $80,000–$150,000; a new commercial embroidery line $50,000–$200,000; a new 3-ton forklift $30,000 or greater. Yet in secondary markets, all of these machines typically sell for 30–60% of the original price; many are refurbs with warranties to lower risk for buyers.

Now, platforms like Surplex, Machinio, and EquipNet aggregate the supply from liquidations, upgrades, relocations, and surplus sales in ways that give entrepreneurs virtually unlimited visibility into global inventories. According to a 2023 Deloitte study, the global used industrial surplus machinery market is over $300 billion annually, with double-digit growth year over year, and is growing rapidly. This liquidity increases the pool of potential entrants and enables small workshops, family firms, and individuals to enter what has previously been strictly a capital-heavy industry.

The Option Value of “Testing a Business”

Economists use the term option value to describe the benefit of being able to reverse a decision. When an entrepreneur purchases a piece of used machinery, which could be a used laser cutter or a used generator set, they typically understand that the machinery can be resold later with very little, if any, value loss. So instead of the investment being sunk, it becomes an option, whereby the entrepreneur is able to test demand and scale up the business without irrevocably committing to the decision.

In real terms, if the machinery is worth 70–80% of its value after a year of use, then failing or exiting the business is a small cost, and thus this setup provides a greater level of exploratory and innovative behavior.

This is particularly relevant to emerging economies where capital constraints and limited financing options have inhibited entrepreneurship. The second-hand market for equipment diminishes the irreversibility of the investment—the second vital component of Dixit and Pindyck’s model of market entry utilizing real options.

Distributed Production, Micro-Factories, and Self-Employment

Less costly entry points also allow for distributed production models. Micro-factories—small, flexible units operating close to customers—can be set up for tens of thousands versus hundreds of thousands of dollars. In the U.S., we have seen localized metal working garages, custom fabrication shops, and small-batch food production in response to the availability of used mixers, presses, chillers, and fabricating tools.

This shift provides the opportunity not only for start-ups but, as well, for option-portfolio entrepreneurship—the ability for a person to have side businesses that could not exist 10 years earlier. In studies conducted in the developing world, the investment of used light machinery drives self-employment rates up by 8–12%, particularly among youth.

The Problem: Excess Entry and Churn

That said, lowered barriers aren't all that they are cracked up to be. Economic theories of free entry suggest that if specific fixed costs drop too low, economies can evolve into excess entry. There can indeed be too many firms competing over too few customers, and time will be lost and churned, leading to lower average profitability.

As a result, secondary markets may enable—somewhat amusingly—a "race to the bottom" in some areas of specialized markets; this doesn't seem plausible because it usually doesn't impact what we see in printing shops, or custom machining services, or disposable small food manufacturing. If everyone has a new business and the entry costs are reasonably low, someone's entering, generally without understanding the operating costs, even if the machinery is inexpensive.

Finally, even used machinery can be a quality misalignment issue, leading to adverse selection issues—leading to warranties that are poorly built to cover imperfections and inspections identifying value errors that are highly unnecessary.

Conclusion

The emergence of global secondary marketplaces for industrial equipment has shifted the capital investment model from a sunk or high-risk undertaking to one that is flexible, liquid, and easy to access. These secondary markets allow for durable fixed costs to become variable costs, while improving option value as a function of reduced acquisition costs, which may allow for a more robust entrepreneurial ecosystem related to distributed production. However, these benefits could introduce structural risks related to entry into the market, a mismatch of quality to meet demand, and increasing competitive instability.

Nevertheless, the macroeconomic consequences are apparent: when productive assets are mobile, affordable, and recoverable, the speed with which small businesses become established increases, leading to increased economic dynamism.