Price Strategies in a Vertically Differentiated Mutual Fund Market

Abstract

Several academic studies show that mutual funds set their prices in a strategic way according to their level of quality. This study examines a market in which two vertically differentiated mutual funds compete. Their price strategies are determined for the cases with complete and incomplete information. Our results show that mutual funds prefer to set their prices sequentially and that they are then indifferent to being the first or the second mover. With incomplete information, the presence of a lower quality mutual fund compels the high quality mutual fund to set lower prices at small levels of quality difference.