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Price competition in the mutual fund industry

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  • Parida, Sitikantha
  • Tang, Zhenyang

Abstract

We find a puzzling fact about mutual fund industry that funds operating in more competitive segments charge higher fees. We argue that this surprising positive relation between competition and fund fees is consistent with strategic fee setting by funds. Fund performance is better and more persistent in less competitive segments, which attracts relatively more performance-sensitive investors. This leaves relatively less performance-sensitive investors in more competitive markets. Hence, funds operating in more competitive markets face a relatively inelastic demand curve and take advantage of it by increasing their fees (which reduces investors' net returns). Our findings have important policy implications that market competition on its own may not be sufficient to decrease fund fees and regulatory interventions are required to increase investor awareness of mutual fund fees and their adverse impacts on net fund performance.

Suggested Citation

  • Parida, Sitikantha & Tang, Zhenyang, 2018. "Price competition in the mutual fund industry," Economic Modelling, Elsevier, vol. 70(C), pages 29-39.
  • Handle: RePEc:eee:ecmode:v:70:y:2018:i:c:p:29-39
    DOI: 10.1016/j.econmod.2017.10.005
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    References listed on IDEAS

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    Cited by:

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    2. Katarzyna Perez & £ukasz Szymczyk, 2022. "Actual rate of the management fee in mutual funds of different styles," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 17(4), pages 969-1014, December.
    3. Coudert, Virginie & Salakhova, Dilyara, 2020. "Do mutual fund flows affect the French corporate bond market?," Economic Modelling, Elsevier, vol. 87(C), pages 496-510.
    4. Parida, Sitikantha, 2024. "The impact of salient fees: Evidence from the mutual fund market," International Review of Financial Analysis, Elsevier, vol. 92(C).
    5. Juan Carlos Matallín-Sáez & Amparo Soler-Domínguez & Diego Víctor Mingo-López, 2021. "On management risk and price in the mutual fund industry: style and performance distribution analysis," Risk Management, Palgrave Macmillan, vol. 23(1), pages 150-171, June.
    6. Fricke, Daniel & Greppmair, Stefan & Paludkiewicz, Karol, 2024. "You can’t always get what you want (where you want it): Cross-border effects of the US money market fund reform," Journal of International Economics, Elsevier, vol. 147(C).
    7. Sha, Yezhou, 2020. "The devil in the style: Mutual fund style drift, performance and common risk factors," Economic Modelling, Elsevier, vol. 86(C), pages 264-273.
    8. Shi, Yang & Chen, Shu & Liu, Ruiming & Kang, Yankun, 2022. "Fund renaming and fund flows: Evidence from China's stock market crash in 2015," Economic Modelling, Elsevier, vol. 108(C).

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    More about this item

    Keywords

    Fund fees; Price competition; Mutual funds; Strategic fee setting;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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