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]
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]
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.
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.