Price competition in the mutual fund industry

• Published in: Economic modelling 2018-04, Vol.70, p.29-39
• Main Authors: Parida, Sitikantha, Tang, Zhenyang
• Format: Article
• Language: English
• Subjects: Fund fees; Mutual funds; Price competition; Strategic fee setting
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2017.10.005

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. •Mutual funds operating in more competitive market segments charge higher fees.•This is consistent with strategic fee setting by mutual funds.•Market competition on its own may not be sufficient to decrease the fund fees.•Interventions targeted at increasing investor awareness of fund fees may help.