The Product Market Effects of Index Inclusion

86 Pages Posted: 1 Sep 2021 Last revised: 9 Mar 2022

See all articles by Varun Sharma

Varun Sharma

Kelley School of Business, Indiana University; Nanyang Business School; London Business School

Date Written: August 1, 2021


I investigate how a firm's inclusion in an index affects its product market outcomes. I compile a micro-level dataset that matches firms' investors with firms' products and customers. Using a plausibly exogenous change in firms index membership, which increases the proportion of firms' equity held by benchmark-constrained funds that track the index, I show that firms (i) reduce product prices, especially for products with lower market share, (ii) generate higher sales, but at the cost of lower profitability, and (iii) introduce new products and diversify. Furthermore, with a higher proportion of such investors, large firms get a competitive advantage and sell similar products 7% cheaper, resulting in a 30% gain in market share. To shed light on the mechanism, I provide evidence that inelastic demand from benchmark-constrained investors allows firms to raise more equity and invest in expanding their customer base and product portfolio. A general equilibrium model with product-level habits and heterogeneous firms further corroborates these findings. These results show that benchmarking can increase product affordability but potentially at the cost of higher market concentration.

Keywords: Investor Heterogeneity, Benchmarking, Index Inclusion, Product Prices, Product Market, Customer Compositions, Industry Competition

JEL Classification: G23, G11, G12, D4, D12

Suggested Citation

Sharma, Varun, The Product Market Effects of Index Inclusion (August 1, 2021). Available at SSRN: or

Varun Sharma (Contact Author)

Kelley School of Business, Indiana University ( email )

1275 E 10th St
Bloomington, IN 47405
United States
8128377912 (Phone)
47405 (Fax)


Nanyang Business School ( email )

48 Nanyang Avenue
Singapore, Singapore 639818


London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom


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