The Effects of Audit-Firm Monopolies within Local Audit Markets

58 Pages Posted: 14 Feb 2018 Last revised: 16 Jul 2018

See all articles by Jaehan Ahn

Jaehan Ahn

Northeastern University - Accounting Group

Date Written: July 14, 2018


This study identifies auditors who monopolize a city-industry audit market (i.e., monopolist auditors) and examines their pricing strategy as well as audit quality. I document that monopolist auditors charge lower fees than do industry specialist auditors. This result is consistent with a monopolists’ pricing strategy (i.e., limit pricing) to deter new entrants but contrasts with regulators’ concerns about monopoly pricing. I also find that monopolist auditors more often fail to detect misstatements than do industry specialist auditors. This is consistent with regulators’ concerns about market-dominating auditors’ complacency. In cross-sectional tests, limit pricing is predominantly evident in homogenous operation industries where more profits are at stake while it is less evident in industries requiring complex accounting, which operates as a natural barrier to entry. In addition, I find that monopolist auditors’ audit failures are more pronounced when the current market competition within a city is low. These findings suggest that auditors exhibit distinctive incentives when they lack the closest competitor.

Keywords: Monopoly, Audit market concentration, Industry specialist, Audit fees, Misstatement, Limit pricing, Complacency

JEL Classification: M40, M42, D40, D42

Suggested Citation

Ahn, Jaehan, The Effects of Audit-Firm Monopolies within Local Audit Markets (July 14, 2018). Northeastern U. D’Amore-McKim School of Business Research Paper No. 3110936. Available at SSRN: or

Jaehan Ahn (Contact Author)

Northeastern University - Accounting Group ( email )

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