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This paper identifies in the mutual fund industry a novel form of product differentiation - financial product differentiation over the state space. On the one hand, it is a well-documented fact that investors chase past performances of the mutual funds. On the other hand, the mutual funds' performances are determined not only by fund managers' abilities, but also by stochastic noise factors. In such a context, to avoid head-to-head competition created by holding the same portfolio, the mutual fund managers could gain higher profits by holding different portfolios which yield distinct returns at varying states. In other words, different funds win and attract cash in different periods and thus obtain market power alternatively. To empirically test this idea, this paper rigorously developed a structural model - a multinomial IV logit model with random characteristics. Similar to BLP (1995), this model produces meaningful own-price and cross-price elasticities for financial products. It estimates that, on average, equity mutual funds can increase their profits by roughly 30% ($2.2 bn) through financial product differentiation over the state space. It concludes that from the social welfare point of view, there exists excess entry in the mutual fund industry if we assume free-entry and the entry incurs fixed costs.