Quality and Product Differentiation: Theory and Evidence from the Mutual Fund Industry

71 Pages Posted: 11 Oct 2021 Last revised: 27 Jul 2022

See all articles by Maxime Bonelli

Maxime Bonelli

HEC Paris - Finance Department

Anastasia Buyalskaya

California Institute of Technology - Division of the Humanities and Social Sciences

Tianhao Yao

HEC Paris

Date Written: October 8, 2021

Abstract

We study product differentiation in the mutual fund industry. We introduce a model in which funds with heterogeneous quality compete for investors by setting their level of product differentiation. In equilibrium, low-quality funds choose to be more differentiated and cater to a smaller set of investors. Using textual analysis of fund prospectuses, we confirm empirically that funds with lower expected performance—low-quality funds—tend to be more differentiated. To test this mechanism, we use the publication of Morningstar rating to capture shocks to fund perceived quality. Funds receiving a low rating respond by increasing their product differentiation, which makes them less likely to die out. This has a market-level impact on the menu of funds available to investors.

Keywords: Mutual Funds, Product Differentiation, Market Structure, Textual Analysis, Ratings

JEL Classification: G23, G11, D83, L1

Suggested Citation

Bonelli, Maxime and Buyalskaya, Anastasia and Yao, Tianhao, Quality and Product Differentiation: Theory and Evidence from the Mutual Fund Industry (October 8, 2021). HEC Paris Research Paper No. FIN-2021-1428, Available at SSRN: https://ssrn.com/abstract=3939239 or http://dx.doi.org/10.2139/ssrn.3939239

Maxime Bonelli (Contact Author)

HEC Paris - Finance Department ( email )

France

Anastasia Buyalskaya

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

Tianhao Yao

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
0640759646 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
220
Abstract Views
863
rank
203,463
PlumX Metrics