Demand spillovers and market outcomes in the mutual fund industry


  • I am grateful to Heski Bar-Isaac, Allan Collard-Wexler, Michael Halling, Marcin Kacperczyk, Erik Kole, and seminar participants at the 2010 FIRS Conference, 2010 Professional Asset Management Conference at Erasmus University, University of Illinois at Urbana-Champaign, and University of Amsterdam for comments. The editor (Ali Hortaçsu) and two anonymous referees provided useful suggestions that substantially improved the article.


When consumers concentrate their purchases at a single firm, firms that offer more products than their rivals gain market share for all their products. These spillovers induce firms to offer a greater variety of products rather than lower prices, and a concentrated industry with few large firms can arise if spillovers are strong enough. This article 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 nontrivial, families offer many 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.