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Product Differentiation, Search Costs, And Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds

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Author Info
Ali Hortaç Su
Chad Syverson

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Abstract

We investigate the role that nonportfolio fund differentiation and information/search frictions play in creating two salient features of the mutual fund industry: the large number of funds and the sizable dispersion in fund fees. In a case study, we find that despite the financial homogeneity of S&P 500 index funds, this sector exhibits the fund proliferation and fee dispersion observed in the broader industry. We show how extra-portfolio mechanisms explain these features. These mechanisms a lso suggest an explanation for the puzzling late-1990s shift in sector assets to more expensive (and often newly entered) funds: an influx of high-information-cost novice investors. © 2004 MIT Press

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Publisher Info
Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 119 (2004)
Issue (Month): 2 (May)
Pages: 403-456
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Handle: RePEc:tpr:qjecon:v:119:y:2004:i:2:p:403-456

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  4. Mark Armstrong & John Vickers & Jidong Zhou, 2008. "Prominence and Consumer Search," Economics Series Working Papers 379, University of Oxford, Department of Economics. [Downloadable!]
  5. Paula A. Tkac, 2004. "Mutual funds: temporary problem or permanent morass?," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 1-21. [Downloadable!]
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  8. James J. Choi & David Laibson & Brigitte C. Madrian, 2006. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," NBER Working Papers 12261, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Gautier, Pieter A & Moraga-González, José-Luis & Wolthoff, Ronald, 2007. "Structural Estimation of Search Intensity: Do Non-Employed Workers Search Enough?," CEPR Discussion Papers 6440, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. David Laibson & Xavier Gabaix, 2004. "Competition and Consumer Confusion," Econometric Society 2004 North American Summer Meetings 663, Econometric Society. [Downloadable!]
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  13. Maarten C.W. Janssen & José Luis Moraga-González, 2007. "On Mergers in Consumer Search Markets," Tinbergen Institute Discussion Papers 07-054/1, Tinbergen Institute. [Downloadable!]
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  15. José Luis Moraga-González & Zsolt Sándor & Matthijs R. Wildenbeest, 2008. "Nonparametric Estimation of the Costs of Non-Sequential Search," Tinbergen Institute Discussion Papers 07-102/1, Tinbergen Institute. [Downloadable!]
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  16. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Ian McCarthy, 2008. "Simulating Sequential Search Models with Genetic Algorithms: Analysis of Price Ceilings, Taxes, Advertising and Welfare," Caepr Working Papers 2008-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
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