Auditor Market Share, Product Differentiation and Audit Fees

Dominica Suk-yee Lee

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Auditing, Earnings Management, Governance Merger and Competition Analysis Corporate Governance and Financial Management

Abstract

This study examines the effects of auditor market share and product differentiation on audit fees. Previous studies have attributed the price premium charged by the Big Eight (the Big Six in the present study) to Big Eight product differentiation. However, such a price premium could be partly due to monopoly pricing. In the present study, the Hong Kong audit market provides a unique setting in which a non-Big Six local auditor has a market share comparable to those of the third and fourth largest Big Six firms. This makes it feasible to control for the effects of market share via matching. Also, the wide disparity among the Big Six firms ‘market shares in Hong Kong makes it feasible to test for the effects of market power on audit fees. The results show that, consistent with prior studies, the Big Six audit firms charge higher audit fees than non-Big Six firms in the small auditee, but not the big auditee, market. This suggests that similar economic forces to those other audit markets are also at work in Hong Kong. Despite the Big Six firms’ widely different market shares, there was no price differentiation among them. Yet there was a Big Six price premium over the large local firm with a similar market share to those of two of the Big Six. Together, these results suggest that the Big Six price premium is a result of product differentiation rather than monopoly pricing.

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References

1981The Role of Market Forces in Assuring Contractual Performance 1980The Pricing of Audit Services: Theory and Evidence 1981Auditor independence, ‘low balling’, and disclosure regulation 1986Audit Fees and Auditor Size: Further Evidence 1984The effect of audit firm size on audit prices 1994The Production of Audit Services: Evidence from a Major Public Accounting Firm 1979The economics of industrial organization 1983Structure-Profit Relationship at the Line of Business and Industry Level

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