In a market limited in size, potential new competitors have little incentive to enter because doing so would lower the industry’s returns below the cost of capital.
Example: Union Pacific Corp.
Dominion Energy Inc is an integrated energy company. Its activities include electric generation, natural gas transmission, storage, distribution and gathering pipelines, and electric transmission and distribution lines. Morningstar states that Dominion’s Atlantic Coast Pipeline “is an excellent example of the dynamics of the efficient scale moat source” because “once a pipeline is constructed, there is little incentive for competitors to enter a market".
This concept contributes to reducing the risk of an investment in Moat ETFs as it would be very complex for new companies to replace the existing ones.
Risk: Investors should consider risks before investing. See dedicated risk factors section on this website.