Journal of Accounting & Economics vol:53 issue:1-2 pages:450-465
This study empirically examines the effects of competition through differentiation on audit pricing. Based on prior economic theory on differentiated-product markets (e.g., Hotelling, 1929; Tirole, 1988), we hypothesize that audit fees are affected by an auditor’s relative location in a market segment. We define audit markets per industry segment and U.S. Metropolitan Statistical Area and specify an auditor’s industry location relative to the client (auditor-client industry alignment) and relative to the closest competitor (industry market share distance to closest competitor). We find that audit fees increase in both auditor-client industry alignment and industry market share distance to the closest competitor.