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The Mutual Fund Industry: Competition and Investor Welfare resources

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Introduction T shoe manufacturing during the 1950s in the Soviet Union.1 Under the ts to consumers from competition are most apparent whenhe beneficompetition is absent. As an example, there is a story told of men’s Soviet central planning authority, several plants manufactured identical style men’s black shoes. Each plant was assigned a production quota, and each plant met its quota. There remained, however, a manufacturing problem that the central planners had not solved— the shoes tended to fall apart within a short time period. A young planner offered a bright idea— identify each pair of shoes by the plant of origin. Through this simple act, the plants were forced to compete on product quality. Each plant’s reputation for shoe quality and its subsequent fi nancial remuneration from the state were now at risk. Low- quality producers could easily be identifi ed and their shoes shunned by consumers when making future purchases. Similarly, plants could be penalized for low quality by Soviet authorities. Introducing a way for consumers to choose be- tween seemingly like products produced competition between shoe manufac- turers, and shoe quality improved dramatically. In countless other examples, the presence or absence of competition is of paramount importance to the well- being of consumers. Competition leads to lower prices, better product quality, more rapid technological improvements, lower fi rm costs, and greater consumer satisfaction. In this book, we examine competition in the mutual fund industry.2 For de cades the mutual fund industry has been embroiled in controversy over the extent of price competition between fund investment advisers and the level of fees charged to fund investors. Critics contend that mutual fund investors are

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