The measure of the competitive barrier, if any, that gives a company an advantage over its rivals and allows it to generate above-average returns on invested capital. Four major types of economic moats are:
1) high customer switching costs;
2) economies of scale;
3) intangible assets such as brands or patents;
4) the network effect.
Morningstar divides stocks into three categories according to moat size:
1) wide moat (companies with the strongest competitive advantage);
2) narrow moat (those with some competitive advantage);
3) no moat (those with no sustainable competitive advantage).
