Mutual Fund Fee-Setting, Market Structure and Markups

This paper develops a model to examine how mutual funds set fees charged to investors within a context of non-competitive market structure. The empirical evidence shows that the performance, age, size and cash ratio of the fund have statistically significant impacts on the mutual fund fees but quantitatively, the majority of the fee is explained by markups that funds add to the marginal cost due to the market power possessed by the funds. Front-end load funds have the highest markups, the back-end funds have the second highest markups and no-load funds have the lowest markup