Price strategies in a vertically differentiated mutual fund market

- Market model with two vertically differentiated mutual funds.
- Investors are assumed to be all non-sophisticated.
- Low and high quality mutual funds propose the same price.
- High quality mutual fund is compelled to suggest a suboptimal price.
- There exists an incentive for the high quality fund to provide quality.

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.