Economic Moat

The term was popularised by the investor Warren Buffett. A company with a wide economic moat can earn high returns for many years because rivals find it very difficult to compete effectively.

Common sources of economic moats include intangible assets, such as strong brands, patents or regulatory licences; switching costs, which make customers reluctant to change suppliers; network effects, where the product becomes more valuable as more people use it; cost advantages, from scale, location or unique processes; and efficient scale, where a market is only large enough to support a few competitors.

For example, a payment network used by millions of merchants and cardholders benefits from network effects that would be extremely difficult for a newcomer to replicate.

Investors look for economic moats because they suggest a company can sustain high profitability and grow its value over time. Moats are not permanent. Technology changes, new regulations or shifts in customer behaviour can erode them, so investors also assess whether a company's moat is widening or narrowing.