Advertising and Market Structure in the US Mutual Fund Industry

This paper empirically investigates the role played by advertising in determining market structures in various segments of the US mutual fund industry. Segments with intermediaries or sophisticated customers exhibit low advertising elasticity of demand, low advertising expenditures, and low market concentration. They also experience further market fragmentation over time. On the contrary, segments which cater to less sophisticated customers without intermediaries exhibit advertising-sensitive demand as well as high advertising expenditures. Those segments exhibit high market concentration and their market structure becomes further concentrated over time. These findings shed light on the impact of consumer characteristics on firms' optimal advertising and resultant market structure.