Tuesday, May 31, 2011
Posted by D. Daniel Sokol
Alessandro Gavazza (NYU Stern School) analyzes Demand Spillovers and Market Outcomes in the Mutual Fund Industry.
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 retireme! nt plans likely accounts for these differential demand patterns between the retail and the institutional segments.