Glossary of Terms

Moat 2019-07-05 08:00:00

Moat

An economic moat is a term used to describe a distinct competitive advantage that a firm has over its competitors that allows it to maintain market share and profitability over an extended period of time. Firms that enjoy economic moats are typically scaled and have significant free cash flows that allow them to minimize operating expenses relative to competitors.

Strong patents, brands and licenses are items that allow firms to control and minimize operating expenses, protect market share and make duplication by competitors extremely difficult. Pharmaceutical companies with patents on specific drugs are able to charge premium prices for the products, while suppliers such as Wal-Mart are able to undercut retail competitors by offering the lowest prices on the market because of immense free cash flows and vertically integrated supply chains.