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Demand spillovers and market outcomes in the mutual fund industry

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  • Alessandro Gavazza

Abstract

When consumers concentrate their purchases at a single firm, a firm that offers more products than its rivals can gain market share for all its other products, as well. These spillovers induce firms to compete by offering a greater variety of products rather than lower prices, and a natural form of industry concentration with few large firms offering many products can arise if spillovers are strong enough. This paper presents a simple model that illustrates this mechanism explicitly. The empirical analysis documents strong demand spillovers in the retail segment of the U.S. mutual fund industry, in which fees are non-trivial, families offer a large number of funds, and the market is quite concentrated. Instead, spillovers are weaker, fees are lower, families offer fewer funds, and the market structure is more fragmented in the institutional segment. The current design of employer-sponsored defined-contribution retirement plans likely accounts for these differential demand patterns between the retail and the institutional segments.
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  • Alessandro Gavazza, 2011. "Demand spillovers and market outcomes in the mutual fund industry," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 776-804, December.
    • Handle: RePEc:bla:randje:v:42:y:2011:i:4:p:776-804
    DOI: j.1756-2171.2010.00154.x
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    2. Genakos, Christos & Kretschmer, Tobias & Nicolle, Ambre, 2021. "Strategic confusopoly: evidence from the UK mobile market," LSE Research Online Documents on Economics 113835, London School of Economics and Political Science, LSE Library.
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    5. Yue Cai, 2021. "Measuring Market Power in the IPO Underwriter," Working Papers 2108, Waseda University, Faculty of Political Science and Economics.
    6. María Isabel Cambón Murcia & Ramiro Losada, 2012. "Competition and structure of the mutual fund industry in Spain: the role of credit institutions," CNMV Working Papers CNMV Working Papers no. 5, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    7. Gimeno, Ruth & Andreu, Laura & Sarto, José Luis, 2022. "Fund trading divergence and performance contribution," International Review of Financial Analysis, Elsevier, vol. 83(C).
    8. Coen, Patrick, 2021. "Information Loss over the Business Cycle," TSE Working Papers 21-1220, Toulouse School of Economics (TSE).
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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