High Market Concentration Research Articles

The effect of audit market structure on audit quality and audit pricing in the private‐client market

AbstractThis study examines whether audit market structure affects audit quality and audit pricing. We analyze two conceptually distinct dimensions of market structure: audit market concentration and client mobility. Focusing on the private‐client segment of the Belgian audit market, we compare the pricing and quality effects of market structure between the segment of small and medium‐sized (SME) clients and the segment of large clients to test how audit complexity moderates such effects. We find that market concentration impairs price and quality competition in the SME‐client segment. Market concentration is unrelated to audit quality in the large‐client segment, where we argue that concentration is endogenous to audit complexity. Furthermore, we find that client mobility stimulates price competition in both segments but improves audit quality only in the large‐client segment. We interpret our findings as evidence that (a) audit market concentration impairs competition especially when audits have low complexity and that (b) the large‐client market segment, characterized by higher audit complexity and higher market concentration, can also be price and quality competitive if clients are sufficiently mobile, and change auditors relatively frequently.

Advertising and Market Structure in the US Mutual Fund Industry

ABSTRACTThis paper empirically investigates the role played by advertising in determining market structures in various segments of the US mutual fund industry. Segments with intermediaries or sophisticated customers exhibit low advertising elasticity of demand, low advertising expenditures, and low market concentration. They also experience further market fragmentation over time. On the contrary, segments which cater to less sophisticated customers without intermediaries exhibit advertising-sensitive demand as well as high advertising expenditures. Those segments exhibit high market concentration and their market structure becomes further concentrated over time. These findings shed light on the impact of consumer characteristics on firms' optimal advertising and resultant market structure.

Audit market concentration, audit fees, and audit quality: A cross-country analysis of complex audit clients

Regulators around the world are concerned about the potentially harmful effects of high audit market concentration on audit pricing and quality. However, results in the overall literature have failed to reach consensus on this issue. We contribute to this debate by arguing that the audit market is segmented and that concentration in the Big 4 segment of the market leads to higher audit pricing. Accordingly, our analyses use international data and focus on concentration within the Big 4 group of firms across countries. We find that audit fees are increasing in our concentration measure for clients where the barriers to entry by competing auditors are higher, as proxied by client size, international operations, and IFRS use. Finally, we find evidence that audit quality is decreasing in Big 4 market concentration for these types of engagements. This indicates a wealth transfer from shareholders to audit firms when auditor concentration is high because these complex clients are charged more, but receive audits that are of lower quality.

Assessment of structure and performance of cattle markets in western Kenya.

Cattle markets play a major role in economic empowerment among cattle-keeping communities in developing countries. The objective of this study was to assess the structure and performance of selected cattle markets in western Kenya. Data was collected using a semi-structured questionnaire administered to livestock traders who visited markets and by conducting focus group interviews. Data was collected on availability of market information, price setting behavior, marketing costs, practices of traders on livestock movements, sources of working capital, and characteristic of respondents. A total of 252 questionnaires and six focus group discussions were conducted for the study. Cattle market concentration indices were analyzed by calculation of Gini coefficient and plotting of Lorenz curves. Additionally, gross marketing margins were calculated to evaluate market performance. The results from this study showed a positive marketing margin in study markets for all cattle categories, the relatively high Gini coefficient of 0.65, and Lorenz curves revealing that in some markets 20% of traders control about 48% of the market share which is an indication of high market concentration. The high Gini coefficient and positive marketing margin obtained imply that study markets were highly concentrated but profitable which is an indication of inequality in the markets. The main barriers to entry in these livestock markets included lack of adequate market information, high operational capital requirements, and high costs of transporting animals. In conclusion, cattle marketing within western Kenya is profitable. However, the high concentration index in markets and presence of entry barriers including lack of flow of information on sources of livestock for trade, mechanism of price setting within markets' high capital outlay, may encourage poor trade practices which may compromise biosecurity standards within markets, and hence necessitating increased risk for spread of livestock diseases and even zoonoses to connected farms and systems.

Audit Market Concentration, Audit Fees, and Audit Quality: A Cross-Country Analysis of Complex Audit Clients

Regulators around the world are concerned about the potentially harmful effects of high audit market concentration on audit pricing and quality. However, results in the overall literature have failed to reach consensus on this issue. We contribute to this debate by arguing that the audit market is segmented and that concentration in the Big 4 segment of the market leads to higher audit pricing. Accordingly, our analyses use international data and focus on concentration within the Big 4 group of firms in across countries. We find that audit fees are increasing in our concentration measure for clients where the barriers to entry by competing auditors are higher, as proxied by client size, international operations, and IFRS use. Finally, we find evidence that audit quality is decreasing in Big 4 market concentration for these types of engagements. This indicates a wealth transfer from shareholders to audit firms when auditor concentration is high because these complex clients are charged more, but receive audits that are of lower quality.

Implications of Application Programming Interfaces for Third‐Party New App Development and Copycatting

Digital platforms can use application programming interfaces (APIs) to support third‐party development of new apps and achieve growth at an unprecedented scale. However, there is also a dilemma between original new development and copycatting by third‐party suppliers. Motivated by this tension, we examined how APIs provided by digital platforms may influence two types of third‐party new app development: original apps and app copycatting. We also investigated how these influences are dependent on app market conditions. We empirically tested our theoretical conjectures using data on a leading web browser platform, and applying analytics techniques on app source code to identify original apps and copycat apps. Based on a difference‐in‐differences identification strategy, our findings suggest that the provision of platform APIs enhance the original new development of apps. While platform APIs may facilitate app copycatting as well, our findings suggest that platform APIs can enhance app suppliers’ relative attractiveness to original new development in comparison to copycatting. The enhancing effect of platform APIs on original new development is strengthened by app market potential and high market‐level app complexity. The enhancing effect of platform APIs on app copycatting is strengthened by app market potential and high market concentration. Our study has important theoretical and practical implications.

Do Audit Clients Prefer Watchdogs or Lapdogs? The Effect of Strictness on Audit Offices’ Market Shares

Regulators frequently interpret a high audit market concentration as a threat to audit quality and want to foster competition. However, both the direction and the sign of the link between quality and concentration are unclear. This paper investigates the link between audit offices’ market shares and two dimensions of their strictness: The probability to issue going concern opinions and the tolerance for earnings management. We develop an analytical model in which the information content of the audit outcome for the addressees of financial statements and the financial statements preparers’ preferences drive the client firms’ demand for audit services of a certain strictness. The model predicts an inverse u-shaped relation between an office’s strictness and its market share. In the empirical part of the paper, we use U.S. data from 2000 to 2016 to test the model’s prediction. For the Big 6 as well as for the non-Big 6 market and according to both dimensions of strictness, we find lower market shares for the strictest offices compared to offices with average levels of strictness. Moreover, relative to Big 6 offices with average strictness, we find lower market shares of Big 6 offices that are lenient in their going concern decisions, but not if they are lenient in terms of discretionary accruals. In contrast, non-Big 6 offices that allow for high levels of discretionary accruals have lower market shares, but not if they issue going concern opinions only rarely.

The impact of unexpected natural disasters on insurance markets

ABSTRACT In this paper, we examine the impact of unexpected natural disasters on the insurance industry. The industry is exposed to greater risks in states with large populations. Hence, we normalize the unexpected disasters with the population of the state. We find evidence that the total sales of the insurance industry goes up in response to an unexpected disaster. However, we also find evidence that unexpected disasters lead to higher market concentration. This could either be because some insurance firms becoming insolvent or people preferring to purchase insurance from larger firms.

Impact of Market Concentration on Employment and Wages: a Look at the Insurance Industry

The falling share of labor in national income is a global concern. This study examined the impact of changes in market concentration ratios in the insurance industry on employment, the share of wages, sales (premiums), and annual wages. Panel data were analyzed for the period 2001 to 2012 for the life, property, and health insurance industries, available from the Bureau of Economic Analysis, Bureau of Labor Statistics, and SNL Financial Analysis database. Using a fixed effects model, we found that higher market concentration was associated with lower employment in the industry and a lower share of wages. However, there was no statistically significant association between concentration and average annual wage. Moreover, there was evidence that market concentration is positively associated with higher total sales (premiums received by the companies). Thus, we conclude that lower employment is not driven by the poor economic performance of the industry.

The impact of market competition on CEO salary in the US energy sector1

In this work, we examine the impact of market competition on CEOs' salaries by analyzing a sample of allS&P American firms in the energy sector, in the 1992–2015 time-span, and measuring market competition by means of the so-called Herfindhal-Hirschman-Index. We divide industries into three sub-groups based on small, medium and high market concentration and try to expand our research by exploring the impact of the recent financial crisis. The paper investigates how CEOs' salaries are affected by firm-level determinants, e.g. firm size, returns on assets, returns on equity, capital expenditure, market concentration, Tobin's Q etc, as well as by the individual characteristics of each CEO, e.g. CEOs age, gender. Based on our findings, the market concentration index in the US energy sector has a negative and statistically significant impact on CEO salary for all firms that operate in either a highly monopolistic or a purely competitive environment. The results of this empirical work are robust after examining for different alternative high order fixed effects specifications.

Market power at the Seattle-Tacoma International Airport: The case of Alaska Airlines

The Seattle-Tacoma International Airport is the hub of Alaska Airlines, the largest airline in the Pacific Northwest. We analyze the impact of Delta Air Lines’ expansion at this airport on the operational and financial performance of Alaska Airlines. The time series consists of quarterly airline and economic data for the period 1Q 2010 to 3Q 2016. We estimated the econometric model using the generalized method of moments based on the Newey-West covariance estimator for robust standard errors. While Alaska Airlines remains dominant at its hub airport its yield has moved closer to Delta Air Lines’, indicating that intense competition has eroded but not eliminated Alaska Airlines’ pricing power. Our results indicate that higher market concentration and advertising intensity tend to reduce profits, implying that the number of firms and the Herfindahl-Hirschman index may not be sufficient in evaluating market power because industries with few competitors may behave as competitive markets when firms engage in profit-reducing non-price competition. Moreover, unit cost has a greater impact on the Lerner index than yield, indicating that cost-efficient airlines have more pricing flexibility, which may increase profits, underscoring the importance of examining an airline’s cost structure in evaluating market power.

Industrial competition and earnings quality in Indonesia

This study examines how the industrial competition affects earnings quality. Our study supports the idea of declining earnings quality when firms' risk increases. We expect that low industrial competition or high market concentration decrease firms' risk by generating more stable revenue for companies. This condition stimulates increasing earnings response coefficient (ERC). Generally, using data from Indonesia, our results show that market concentration affects the relation between earnings surprise and excess return. Further, we find that firms in industries with high market concentration generate higher ERC, especially for profit firms. It means, investors are more likely to use positive earnings data for firms in high market concentration industries in reacting earnings surprise. Our paper contributes to market concentration and ERC studies, especially in Indonesia as one of emerging markets. Low industrial competition improves earnings informativeness.

Industrial competition and Earnings Quality in Indonesia

This study examines how the industrial competition affects earnings quality. Our study supports the idea of declining earnings quality when firms' risk increases. We expect that low industrial competition or high market concentration decrease firms' risk by generating more stable revenue for companies. This condition stimulates increasing earnings response coefficient (ERC). Generally, using data from Indonesia, our results show that market concentration affects the relation between earnings surprise and excess return. Further, we find that firms in industries with high market concentration generate higher ERC, especially for profit firms. It means, investors are more likely to use positive earnings data for firms in high market concentration industries in reacting earnings surprise. Our paper contributes to market concentration and ERC studies, especially in Indonesia as one of emerging markets. Low industrial competition improves earnings informativeness.

Exploring the Conduct of Ethiopian Banks: The Structure- Conduct-Performance Approach

The study uses the views from both bank mangers and regulatory staff to investigate the behavior of banks operating in a concentrated market. As identified in the literature, such variables as bank conduct, has been a neglected topic in the traditional SCP hypothesis. This is due to the claim that bank conduct is a derivative of the industry structure on the one hand and the difficult to quantitatively test the behavior of banks in the system as the proxy variables are not quantitative by nature or else data is not available as they are not represented in the financial records of banks. The study however finds that bank conduct is not necessarily a derivate of the industry structure. Such findings from the qualitative approach witnessed a different behavior of banks than the one suggested in the SCP hypotheses. For instance, given high market concentration, banks in Ethiopia are behaving differently in price competition which remains a less essential parameter to change performances. Service difference has been an important reaction taken by the banks. Banks have been promoting themselves through a mix of approaches and attempted to increase their market share via increasing branch networks. In addition, besides market structure, regulation has been the most important variable affecting banks performance via encouraging homogenous service offerings, similar bank growth strategies and controlling their asset quality positions. Unlike what is claimed in the SCP hypothesis, the qualitative study shows that organic growth, not merger and acquisition, is considered as a dominant strategy that ensure growth in the banking system. Bank risk taking behavior also appears in contrast to the hypotheses as banks behavior towards risk is guided by the development status in the financial market as well as the competition level in alternative markets like foreign banking. The quiet life test result is also unlike the one suggested by the SCP hypotheses as banks are found to be conscious in their expense management decision. The qualitative study also explored additional variables determining bank conduct such as employee retention, top management reputation and quality of relationship with shareholders. DOI : 10.7176/EJBM/11-1-09

Competition and Operating Volatilities around the World

Numerous papers have shown that developing economies are more volatile. We show that, despite greater aggregate and industry stability, performance and size of individual firms in developed countries are more volatile. In developing countries, market imperfections insulate incumbent firms from competition. Consistent with this, firms in developing countries have higher profit, higher market concentration, and less capital raising. Cross-country differences in operating risk and competition intensity are greater in industries that are dependent on external finance, where we expect higher impacts of capital-market imperfections. We show the inverse relation between aggregate and firm-level volatilities has important implications for international studies of cash holding.

Analysis of Onion Marketing Structure in Yola North Local Government Area of Adamawa State, Nigeria

This study analyzed the structure of onion marketing in Yola North Local Government Area of Adamawa State, Nigeria. Data were collected from Jimeta Modern market, Old market and Yola by-pass market based on the existing sampling frame. Descriptive statistics, Gini index and Marketing efficiency were the analytical tools employed. The results revealed that majority (92.5%) of the respondents were male, 62.5% were married with an average family size of 4 persons per household and 52.5% had some level of formal education with a mean marketing experience of 10 years. The average sales recorded per month for wholesalers and retailers were N2,888,000.00 and N372,237.50 respectively, while their respective net incomes per month were N234,610.00 and N35,743.73 respectively. The value of Gini coefficient for wholesalers and retailers were 0.47 and 0.52 respectively, an indication of inequality in earnings among the marketers due to high market concentration resulting to poor market structure. The results further revealed that onion marketing is inefficient in the study area with marketing efficiency scores of 8.82% and 10.62% for wholesalers and retailers respectively. The Return on Investment (ROI) for wholesalers and retailers were N0.081 and N0.096 respectively with retailers having relatively higher ROI. Lack of credit facilities (80%), high cost of transportation (73%) and security challenges (42.5%) were identified as the major problems affecting onion marketers in the area. The study recommends that government should expand its anchor borrower scheme program to include marketers in order to enable them expand their business and improve marketing efficiency.

The relationship of hospital market concentration, costs, and quality for major surgical procedures

BackgroundOur objective was to determine the association between indicators of surgical quality – incidence of major complications and failure-to-rescue – and hospital market concentration in light of differences in costs of care. MethodsPatients undergoing coronary artery bypass graft (CABG), colon resection, pancreatic resection, or liver resection in the 2008–2011 Nationwide Inpatient Sample were identified. The effect of hospital market concentration on major complications, failure-to-rescue, and inpatient costs was estimated at the lowest and highest mortality hospitals using multivariable regression techniques. ResultsA weighted total of 527,459 patients were identified. Higher market concentration was associated with between 4% and 6% increased odds of failure-to-rescue across all four procedures. Across procedures, more concentrated markets had decreased inpatient costs (average marginal effect ranging from -$3064 (95% CI: -$5812 - -$316) for CABG to -$4876 (-$7773 - -$1980) for liver resection. ConclusionIn less competitive (more concentrated) hospital markets, higher overall risk of failure-to-rescue after complications was accompanied by lower inpatient costs, on average. These data suggest that market controls may be leveraged to influence surgical quality and costs.

Impact of Market Concentration on Employment and Wages: A Look at the Insurance Industry

In this study, we examine how the market concentration in the insurance industry impacts employment and wages. We use panel data, with fixed effects, to find that a higher market concentration is associated with lower employment in the industry. Additionally, we find that market concentration is associated with a lower share of wages. However, we do not find any association between concentration and average annual wage. Surprisingly we do find that market concentration is positively associated with higher total sales. Thus, we hypothesize that lower employment is not driven by the poor economic performance of the industry.

Impact of Market Concentration on Effective Sales Tax Rate: Evidence from Insurance Industry

This paper examines the impact of market concentration in the insurance industry on the effective insurance premium sales tax. I use unexpected disasters normalized by the population of the state as a source of exogenous variation in the market concentration. Unexpected disasters lead to the exit of insurance firms from the state leading to higher market concentration. I find empirical evidence that a ten percent increase in market concentration leads to five percent reduction in the effective insurance premium tax rate. This implies a reduction of $84 mn in tax revenues. I also show a correlation between market concentration and campaign contributions. This suggests that higher market concentration increases the likelihood of firms coming together as an interest group and lobby for a favorable (tax) policy.

A DEA-based approach for competitive environment analysis in global operations strategies

While competitive environment analysis is critical to a global retailing operations strategy, there exist research gaps from perspectives of operational performance, retailing industrial environment, and nondiscretionary factors. Therefore, our research objective is to propose a new approach to conduct competitive environment analysis for a global operations strategy in retailing, by examining relationships between discretionary inputs of the supply chain, nondiscretionary inputs of the environment, and performance of retailing. We develop a nondiscretionary data envelopment analysis model to assess performance in retailing and integrate it with econometric analysis. Using multisource data of 124 organizations in the global retailing industry, it is interesting to find: while nondiscretionary factors significantly influence the operational performance of global retailers, firms in an environment with a higher market concentration, larger consumer spending per capita, and smaller inhabitants’ population are more likely to achieve a higher operational efficiency in retailing. Another interesting finding with practical implication is: inputs relevant to outside environment (e.g., suppliers in upstream and outlets in downstream supply chain) can influence operational efficiency more than inputs in internal supply chain (e.g., warehouses).