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Article: "Low-Balling" and Efficiency in a Two-Period Specialization Model of Auditing Competition

Title"Low-Balling" and Efficiency in a Two-Period Specialization Model of Auditing Competition
Authors
Issue Date1999
PublisherCanadian Academic Accounting Association. The Journal's web site is located at http://www.caaa.ca/CAR/index.html
Citation
Contemporary Accounting Research, 1999, v. 16 n. 4, p. 609-642 How to Cite?
AbstractThis paper develops a simple, two-period specialization model to analyze the effect of start-up costs on auditing competition. Audit firms in the model make strategic specialization and pricing decisions. Through specialization, an audit firm achieves a comparative cost advantage over its competitors for all clients whose characteristics are closer to its area of specialization. This comparative cost advantage is further fortified by the presence of start-up costs. As a result, each audit firm obtains some market power and is able to price-discriminate across clients by offering "specialization-and-relationship-specific" audit fee schedules. This paper demonstrates that the practice of "low-balling" is a natural consequence of competition among audit firms. However, low-balling occurs only in a certain market segment where audit firms compete fiercely. This paper also shows that a policy of banning low-balling acts as a substitute for the commitment of the audit firms to partially collude their pricing policies and results in increased profits for audit firms and increased fees. However, it also results in audit firms choosing specializations in a more efficient way, thereby reducing total auditing costs.
Persistent Identifierhttp://hdl.handle.net/10722/177931
ISSN
2015 Impact Factor: 1.782
2015 SCImago Journal Rankings: 2.594
References

 

DC FieldValueLanguage
dc.contributor.authorChan, DKen_US
dc.date.accessioned2012-12-19T09:40:52Z-
dc.date.available2012-12-19T09:40:52Z-
dc.date.issued1999en_US
dc.identifier.citationContemporary Accounting Research, 1999, v. 16 n. 4, p. 609-642en_US
dc.identifier.issn0823-9150en_US
dc.identifier.urihttp://hdl.handle.net/10722/177931-
dc.description.abstractThis paper develops a simple, two-period specialization model to analyze the effect of start-up costs on auditing competition. Audit firms in the model make strategic specialization and pricing decisions. Through specialization, an audit firm achieves a comparative cost advantage over its competitors for all clients whose characteristics are closer to its area of specialization. This comparative cost advantage is further fortified by the presence of start-up costs. As a result, each audit firm obtains some market power and is able to price-discriminate across clients by offering "specialization-and-relationship-specific" audit fee schedules. This paper demonstrates that the practice of "low-balling" is a natural consequence of competition among audit firms. However, low-balling occurs only in a certain market segment where audit firms compete fiercely. This paper also shows that a policy of banning low-balling acts as a substitute for the commitment of the audit firms to partially collude their pricing policies and results in increased profits for audit firms and increased fees. However, it also results in audit firms choosing specializations in a more efficient way, thereby reducing total auditing costs.en_US
dc.languageengen_US
dc.publisherCanadian Academic Accounting Association. The Journal's web site is located at http://www.caaa.ca/CAR/index.htmlen_US
dc.relation.ispartofContemporary Accounting Researchen_US
dc.title"Low-Balling" and Efficiency in a Two-Period Specialization Model of Auditing Competitionen_US
dc.typeArticleen_US
dc.identifier.emailChan, DK: dkchan@hkucc.hku.hken_US
dc.identifier.authorityChan, DK=rp01046en_US
dc.description.naturelink_to_subscribed_fulltexten_US
dc.identifier.doi10.1111/j.1911-3846.1999.tb00598.x-
dc.identifier.scopuseid_2-s2.0-0346451549en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-0346451549&selection=ref&src=s&origin=recordpageen_US
dc.identifier.volume16en_US
dc.identifier.issue4en_US
dc.identifier.spage609en_US
dc.identifier.epage642en_US
dc.publisher.placeCanadaen_US
dc.identifier.scopusauthoridChan, DK=7402216890en_US

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