Audit Firms Face Downward-Sloping Demand Curves and the Audit Market Is Far from Perfectly Competitive
22 Pages Posted: 8 Jun 2017
Date Written: June 5, 2017
We explore how demand estimation can be applied in auditing research and review insights into the market that it has already provided. We set the foundation for the discussion by analyzing difficulties in the interpretation of the audit fee regression, a commonly applied tool in the auditing literature. We then discuss the mechanics of the discrete choice demand estimation approach used by Gerakos and Syverson (2015) and Guo, Koch, and Zhu (2017). We go on to explain how the findings from this work imply that audit firms have market power. That is, the market is not perfectly competitive, and indeed is far from it.
Keywords: auditing, competition, demand estimation
JEL Classification: M42
Suggested Citation: Suggested Citation