When cheaper is better: fee determination in the market for equity mutual funds

In this paper, we develop a model of the market for equity mutual funds that captures three key characteristics of this market. First, there is competition among funds. Second, fund managers' ability is not observed by investors before making their investment decisions. And third, some investors do not make optimal use of all available information. The main results of the paper are that 1) price competition is compatible with positive mark-ups in equilibrium; and 2) worse-performing funds set fees that are greater or equal than those set by better-performing funds. These predictions are supported by available empirical evidence

License auctions when winning bids are financed through debt

We study an auction where two licenses to operate on a new market are sold. Winners finance their bids on a competitive debt market. Due to limited liability, the amount of debt affects their behavior on the product market. In equilibrium, consumer prices are lower than with a beauty contest, where firms obtain their licenses for free. Winning bids are lower than in a model where firms have internal funds. Higher bids cannot be financed due to credit rationing. Expected net firm profits are strictly positive, although firms are a priori identical and have the same information.

Capacity precommitment and price competition yield cournot outcomes

We study an industry of a homogeneous good where n firms with identical technology compete by first building capacity, and then, after observing the capacity decisions, choosing a "reservation price" at which they are willing to sell their entire capacities. We show that every pure strategy equilibrium yields the Cournot outcome, and that the Cournot outcome can be sustained by a pure strategy subgame perfect equilibrium

Equilibrium in a market with intermediation is Walrasian

We show that a profit maximizing monopolistic intermediary may behave approximately like a Walrasian auctioneer setting bid and ask prices nearly equal to Walrasian equilibrium prices. In the model agents trade either through the intermediary or privately. Buyers (sellers) choosing to trade through the intermediary potentially trade immediately at the ask (bid) price, but sacrifice the spread as potential gains. Agents trading privately capture all of the gains to trade, but risk costly delay in finding a partner. We show that when the cost of delay is small, the intermediary sets bid and ask prices nearly equal to Walrasian equilibrium prices. As the cost of delay vanishes, the equilibrium bid and ask prices converge to the Walrasian equilibrium prices. If the possibility of trading through the intermediary is removed, and therefore all trade takes place in the private trading market, then prices are not close to Walrasian equilibrium prices even as the cost of delay vanishes