The behaviour of financial institutions in the French mutual fund industry : a study of economies of scale, economies of scope, switching costs and market power.

Summary The objective of this paper is to analyze the structure of the French mutual fund industry and to study the behavior of financial institutions competing in this industry over two periods: 1989, a year of expansion, and 1995, a year of contraction of the mutual fund market. Our database consists of 162 management institutions offering 823 mutual funds in 1989 and 130 institutions offering 759 mutual funds in 1995. For each of these sicavs we have information on assets under management and management fees. For 1995 we also have information on the assets under management and operating costs of 806 mutual funds managed by 144 institutions. Based on this information, we model a five-product quadratic cost function. From this cost function, we first verify that the predominance of banks (80% of assets) in the mutual fund market does not result in a competitive cost advantage. Second, by measuring economies of scale and scope, we conclude that the optimal institution in terms of costs is a medium-sized institution (from CHF 3.9 billion to CHF 8.4 billion) and offering all five categories of mutual funds. This conclusion raises the problem of explaining the non-optimal behavior of large management companies. This leads us to examine whether the mutual fund market is contestable. We conclude that in 1989, the large institutions did not abuse their market power, but in 1995, the French mutual fund market seems less contestable.