Oligopolistic Competition, Fund Proliferation and Asset Prices

49 Pages Posted: 24 Feb 2023

See all articles by Marco Loseto

Marco Loseto

University of Chicago

Federico Mainardi

University of Chicago - Booth School of Business; University of Chicago - Department of Economics

Date Written: February 19, 2023

Abstract

We develop and estimate a dynamic oligopoly model of the passive mutual fund industry in which multiproduct asset management firms act as fund initiators and decide how many funds to launch in a given investment sector. Both mutual funds and management companies compete a la Cournot and take into account the demand for asset management services from a representative household investor. In the first part of the paper, we provide sufficient conditions for the existence and uniqueness of a steady-state equilibrium in which each management firm operates a constant number of funds and the equilibrium index price is constant. In the second part of the paper, we develop a nested fixed-point algorithm to estimate fund initiation costs separately for the five biggest management companies in the US passive equity industry by matching fund proliferation patterns observed in the data. We find that the top five companies are substantially more efficient and enjoy large scale economies relatively to the rest of the market. In a series of counterfactual exercises, we show that removing the largest management companies from the market would reduce investors' welfare by as much as 25%. Lastly, we characterize analytically the steady-state multiplier of household wealth on the equity index price in terms of the technology primitives of the industry. Our estimates imply that a 1% increase in household wealth increases the valuation of the equity index by 5.5%, consistent with other estimates in the literature.

Keywords: Asset Mangement, Dynamic Oligopoly, Passive Investing, Asset Prices

JEL Classification: G12, G23, G24, L13, L84

Suggested Citation

Loseto, Marco and Mainardi, Federico, Oligopolistic Competition, Fund Proliferation and Asset Prices (February 19, 2023). Available at SSRN: https://ssrn.com/abstract=4364189 or http://dx.doi.org/10.2139/ssrn.4364189

Marco Loseto (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Federico Mainardi

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States
8728182099 (Phone)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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