Pricing and supplier concentration in the private client segment of the audit market: Market power or competition?

Abstract

This study differs from prior audit pricing-studies as 1) it focuses on the issue of price competition in the (small) private client segment of the audit market, and 2) addresses the question whether and how the aUdit-pricing model changed in that market between 1989-1997. Given the significant increases in market concentration and two big audit-fIrm mergers in that period, we try to assess whether price competition (market power) has increased (decreased) or decreased (increased). We use Belgian data on privately owned companies from 1989 and 1997 for our analyses. We fmd that audit fees are significantly associated with the incumbent auditor's market share both in 1989 and 1997. Our results are in line with prior studies on public client samples and hence do not support prior assumptions (see, for example, Simunic 1980) that there are no price premia charged by large auditors in the small-client segment of the audit market. It is however not clear whether the reported price premium is due to market power or differentiated audit quality. As to the evolution of audit pricing in the private client segment of the Belgian audit market between 1989 and 1997, we fmd that the impact of various audit-fee determinants changed signifIcantly and report evidence supportive of increased price competition.

An empirical test of spatial competition in the audit market

“…7 On the one hand, Pearson and Trompeter (1994) find that industry concentration negatively affects audit fees, suggesting that higher concentration is associated with increased price competition, and Bandyopadhyay and Kao (2004) do not find support for their prediction that audit fees are higher in more concentrated markets. On the other hand, Willekens and Achmadi (2003) find that audit fees are positively associated with an auditor's market share and Feldman (2006) finds that since the demise of Arthur Andersen, both market concentration and audit fees have increased. In line with prior evidence that shows that audit firms are local (i.e.…”

“…In a separate thread of the literature on audit market competition, a number of studies investigate the relation between audit fees and the level of audit market concentration (e.g., Pearson and Trompeter, 1994;Bandyopadhyay and Kao, 2004;Willekens and Achmadi, 2003;Feldman, 2006), where concentration is measured at the SIC code level. The evidence is mixed.…”

Concentration Analysis of New Private Residential Units Market in Hong Kong

“…a) Market share and market concentration Market share distribution reflects the extent to which market power is distributed among incumbents (Adelman, 1951;Ye, Lu and Jiang, 2009). Measurement of concentration is a principal way to evaluate the relative power of the market players and is instrumental to gauge the intensity of competition (Adelman, 1951;Willekens and Achmadi, 2003). In this regard, the GSCR suggests the use of market share as the initial screening device in assessing market power.…”

“…CR is represented by the percentage of the market share occupied by the largest firms in a certain industry (Parker, 1991). For example, CR was used to indicate the market power and level of competition of the Belgian audit market (Willekens and Achmadi, 2003).…”

The effect of large audit firm mergers on audit pricing in the UK

“…6 Although Pong (2004) documents a 17.5% reduction in inflationadjusted UK audit fees from 1991 to 1995, there has been little recent work that has addressed this issue. This lack of evidence, and the structural changes resulting from the PricewaterhouseCoopers merger and the demise of Andersen, have rekindled concerns about the competitiveness of the audit market (Hermanson et al, 1987;Gist and Michaels, 1995;Pong, 1998;Willekens and Achmadi, 2003) [1991][1992][1993], but this premium subsequently disappears. Iyer and Iyer (1996) compared the UK audit fees earned by 6 Opinion surveys have yielded results consistent with this research.…”