Advertising and Market Structure in the US Mutual Fund Industry

This paper empirically investigates the impact of consumer characteristics on firms’advertising choice and resultant market structure by exploiting differences in investor clientele across various segments in the US mutual fund industry. I find that firms that sell directly to consumers exhibit a higher advertising elasticity of demand, higher advertising expenditures, and higher market concentration compared to firms that sell through intermediaries. I further find that among firms that sell directly to consumers, those that cater to less sophisticated retail investors show a greater advertising sensitivity of demand, greater advertising expenditures, and greater market concentration compared to those that serve sophisticated institutional investors. These findings are suggestive of how consumer characteristics influence the equilibrium market structure through their impact on firms’advertising choice.