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 questions of whether and how the audit-pricing model changed in that market between 1989 and 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 find 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 that there are no price premia charged by large auditors in the small client segment of the audit market. As to the evolution of audit pricing in the private client segment of the Belgian audit market between 1989 and 1997, we find that the impact of various audit fee determinants changed significantly and report evidence supportive of increased price competition.