What Is a Wide Economic Moat?

The term wide economic moat refers to the competitive advantage that protects a company's place in the market over the long term. Companies with a wide economic moat make it difficult for their rivals to wear down their market share. The term was popularized by 澳洲幸运5开奖号码历史查询:Warren Buffett and is derived from the water-filled moats that surrounded medieval castles. Wide economic moats can be caused by several factors, including high barriers to entry.

Understanding Wide Economic Moats

As noted above, the term economic moat was coined by 澳洲幸运5开奖号码历史查询:Berkshire Hathaway's Warren Buffett. It refers to a company's ability to maintain a competitive advantage to protect its long-term profits and 澳洲幸运5开奖号码历史查询:market share from competing firms. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from out🌄siders.

Businesses with at least one factor of 澳洲幸运5开奖号码历史查询:Porter's 5 forces model would possess 🅘a wide economic moat. For example, a business that holds an exclusive patent for the creation of a miracle drug would effectively keep potential competitors ouℱt of its business. Having few or no competitors would allow the company to continually generate high levels of profit.

A company that exists in a business where the 澳洲幸运5开奖号码历史查询:startup costs are prohibitive for small entrants would also have a wide moat. There are several other ways in which a company creates an economic moat that allows it to have a significant advantage over its competitors. Some of the most common reasons behind economic moats are explained below.

How to Establish Wide Economic Moats

Companies have several ways they can establish (wide) economic moats to retain market share. This may make it difficult for the competition to steal customers and eat away at revenue. Let's look at some of these in more detail.

High Barriers to Entry

High 澳洲幸运5开奖号码历史查询:barriers to entry can limit competition within an industry. These factors can be related to situat🐈ional or economic, or they may be put up by the dominant force i𒐪n the market.

Economic barriers to entry often include things like tax laws and regulatory hurdles. High corporate or business taxes and red tape can make it challenging for new players to (want🤡 to) enter the market. This can provide existing businesses with a form of protection from new competition. Higher startup costs can also deter future participants in the sector.

Other factors that prevent new compani✨es from entering the market iღnclude:

• Pricing: A business that can keep its operating costs low and its sales high can undercut its competition by lowering its prices and keeping rivals at bay. Walmart (WMT) is a good example. It has an immense volume of sales and negotiates low prices with its suppliers, resulting in low-cost products in its stores that are hard to replicate by its competitors.
• Switching Costs: This phenomenon makes it very time-consuming and expensive for consumers to switch products or brands. Autodesk (ADSK) offers various software solutions for engineers and designers that are very difficult to learn. Once an Autodesk customer starts using its software, he is unlikely to switch, allowing Autodesk to charge premium prices for its products.
  

Intangible Assets

澳洲幸运5开奖号码历史查询:Intangible assets are anꩲy proprietary assets t𒈔hat a company has that can't be touched but can significantly impact sales. This includes things like proprietary technology, patents, brands, and licenses that allow a company to protect its production process and charge premium prices.

While brands are typically derived from superior product offerings and marketing, patents are obtained as a result of companies' filings with governments to protect know-how for a specific period, typically 20 years. For instance, pharmaceutical companies earn high profits due to patented drugs after spending billions on 澳洲幸运5开奖号码历史查询:research and development (R&D).

Efficient Scale

Efficient scale arises when a particular market is best served by a limited number of companies, giving them near-monopoly statuses. Utility firms are examples of companies with an efficient scale that is necessary to serve electricity and water to their customers in a single geographic area. Building a second utility company in the same area would be too costly and inefficient.

The Network Effect

澳洲幸运5开奖号码历史查询:The network effect can further fortify or widen a company's economic moat by making its products more valuable when more people use them. One example of a network effect is online marketplaces such as Amazon (AMZN) and eBay (EBAY), which are widely popular among consumers because of the large number of people buying and selling various products through their pla🅰tforms.

Benefits of Wide Economic Moat

The obvious benefit of having a wide economic moat is that the company can keep its rivals at bay. This means that the company remains a dominant force in the marketplace and retains its market share. Being able to maintain or widen a moat can also increase a company's 澳洲幸运5开奖号码历史查询:brand value. This is very important for companies that are heavily invest♒ed in a brand, such as Apple's iPhones.

Economic moats can also benefit other stakeholders. For instance, companies that have a wide economic moat are better equipped to lower pr🅰ices. This can ꦆprovide a major advantage to consumers. Paying less for a product or service gives people more money in their pocket for other things, including savings.

澳洲幸运5开奖号码历史查询:Investors are also in a position to gain from companies with wide economic moats. Companies can increase their cash flow and can guarantee returns for their investors by narrowing out other players by creating a competitive ad🐬vantage. These returns can be multiplied if businesses can maintain and expand a durable economic moat.

The Bottom Line

An economic moat is a competitive advantage that companies have over their rivals. It allows them to protect their market share and keep their competitors at bay. While it certainly has it advantages, there are certain drawbacks to having an economic moat. First, it creates high expectations from customers, especially when it comes to pricing and delivery times. It also means that the quality of a company's goods and services must meet the demands of consumers.