Economic moat

An economic moat, often attributed to investor Warren Buffett, is a term used to describe a company's competitive advantage.^[1] Like a moat protects a castle, certain advantages help protect companies from their competitors.^[2]

History

As of 2012, Buffett had used the word "moat" in the Berkshire Hathaway shareholder letters more than 20 times since 1986.^[3] The 2016 shareholder letter is the most recent letter to contain the word moat.^[4]

Types of economic moats

Examples of some economic moats are network effect, intangible assets, cost advantage, switching costs, and efficient scale.^[5]

Network effect: A network effect happens when the "value of a good or service grows" as it's used by existing and new customers.^[6] An example is Amazon.^[7]

Intangible assets: Brand identity, think Nike^[8] or Apple; patents; and government licenses are examples of intangible assets.^[9]

Cost advantage: Companies that can keep their prices low can maintain market share and discourage competition. Walmart has cost advantage.^[6]

Switching costs: Customers and suppliers might be less likely to change companies or providers if the move will incur monetary costs, time delays, or extra effort.^[10]

Efficient scale: Companies that have a natural monopoly - or operate in markets or industries where there are few rivals - benefit from efficient scale. Utility companies are examples.

See also

• Barriers to entry