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Stocks 205: Economic Moats

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1.
Why would a company raise its switching costs?
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To lock its customers in. The more customers are locked in, the more likely a company can raise prices and still keep them.
2.
Making it prohibitively expensive for customers to leave your company for your competitors is a way to build a sustainable competitive advantage in your industry.
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True. By creating high switching costs, you can keep your advantage.
3.
An example of the network effect is when _______.
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A company starts making parts for another company. This kind of complementarity increases the value of the latter company.
4.
An efficient scale occurs in a limited market being efficiently served by _______.
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One or very few companies. The "efficient" part of it means that very few players are needed to keep the market running well.
5.
What type of moat are you likely to find in a commodity industry?
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Low-cost producer. Low-cost producers in commodity businesses are typically "price-takers," meaning they have little or no pricing power and must accept whatever price the market is offering for their goods or services; they do best if they are low-cost producers in such cases.
6.
When a company tries to differentiate its product from those of its competition by spending money on marketing, it is attempting to create what type of moat?
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Intangible assets. Marketing is generally done to build brands, and brands are intangible assets.