Economic Moat

Structural features that help a business protect sustainable profits from competition.

Network effects · Switching costs · Cost advantage · Efficient scale · Intangible assets

What it is

In investing, an economic moat describes a durable structural advantage that allows a company to earn returns above its cost of capital for an extended period. The term was popularised by Warren Buffett and formalised by investment researchers such as Morningstar.

Why it matters

Without a moat, above-average profits tend to attract competitors until returns are competed away. Understanding moats helps investors and operators judge durability, not just current performance.

How to cultivate it

Build products whose value grows as more people use them (network effects).
Become deeply embedded in customers' workflows (switching costs) — by being genuinely useful, not by trapping them.
Develop process, scale, or location advantages that lower cost.

Where it can fail

Technology shifts that make the old advantage irrelevant.
Regulatory change or loss of legal protection.
Moats maintained by harming customers, which invites backlash and regulation.

Examples

Morningstar's research framework identifies five sources of economic moat: switching costs, network effect, intangible assets, cost advantage, and efficient scale. — Morningstar — Economic Moat