Abstract This paper provides a theoretical model on the determination of fund expenses, focusing on vertical structures of the fund industry and customer switching costs. We also empirically test our theoretical findings using data from the Korean fund market. Our first theoretical finding is that a distribution channel that is integrated with an asset management company has an incentive to charge higher distribution fees than an independent channel: a vertically integrated distribution channel tends to raise the costs of rival asset management companies. Our second finding is that the equilibrium is asymmetric in certain circumstances: a channel may want to remain independent, whereas the other wants to be vertically integrated with an asset management company. Our empirical analysis showed evidence supporting the first theoretical prediction.