A company's economic moat can be the result of one or more competitive advantages. Morningstar recognizes five sources of competitive advantage:
- Switching costs are obstacles that keep customers from changing from one product to another. These costs aren't necessarily monetary; they're generally inconveniences.
- The network effect happens when the value of a good or service increases for both new and existing users as more people use that good or service. In other words, as more people use the service, the more invaluable it becomes.
- Intangible assets are things such as patents, government licenses, and brand identity that keep competitors at arm's length.
- A company with a cost advantage can produce goods or services at a lower cost, thereby undercutting competitors or achieving higher profitability.
- Efficient scale benefits companies operating in a market that only supports few or no competitors, limiting rivalry.
Some companies have one moat source; others have two or three.
Susan Dziubinski does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.