Quality and Product Differentiation

Maxime Bonelli, Anastasia Buyalskaya and Tianhao Yao
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Maxime Bonelli: HEC Paris - Ecole des Hautes Etudes Commerciales
Anastasia Buyalskaya: CALTECH - California Institute of Technology
Tianhao Yao: HEC Paris - Ecole des Hautes Etudes Commerciales

Working Papers from HAL

Abstract: We study product differentiation in the mutual fund industry. We design a model in which funds with heterogeneous perceived quality can choose their level of product differentiation. In equilibrium, high quality funds choose broad market designs (i.e., low differentiation) appealing to many investors, while low quality funds adopt niche designs (i.e., high differentiation) that investors either love or loath. Using as a measure of fund differentiation the degree of textual uniqueness of investment strategy description in fund prospectuses, we confirm empirically that funds with lower expected performance tend to differentiate more. We use the issuance of Morningstar rating to previously unrated funds as an exogenous shock to perceived quality to identify the economic mechanism. We find that funds receiving a low rating increase their product differentiation. The effect is mainly concentrated on funds run by small management companies, a feature associated with lower performance. This increase in product differentiation makes funds more likely to survive. It also has a market-level impact on the menu of funds available to investors.

Keywords: Market Structure; Product Differentiation; Ratings; Mutual Funds; Textual Analysis (search for similar items in EconPapers)
Date: 2021-10-08
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-03501744

DOI: 10.2139/ssrn.3939239

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