Instead of NAS constraints, auditor dos and also the representative bring NAS on prices as they participate in undifferentiated Bertrand competition

Corollary 1

Lemma step one ensures that, absent NAS limitations, new NAS industry will not relate with this new audit field.18 18 Observe that introducing possess modeled somewhere else, such versatility risks or education spillovers, create free elite dating chat rooms France split it independence. Actually, undifferentiated Bertrand battle throughout the NAS industry means that auditor dos never ever produces NAS rents in place of NAS limits.

  • (i) In the event the , up coming auditor dos deal auditing functions to help you client firms and you may , and you can auditor step 1 sells auditing properties to help you customer enterprise . Auditor dos chooses audit quality and you will establishes audit charge .
  • (ii) If you don’t, in the event that , then auditor 2 deal auditing services to help you buyer enterprise and you will auditor step one sells auditing qualities to help you client providers and . Auditor 2 decides audit quality and you will set audit fees .

Auditor dos face a good tradeoff ranging from promoting auditing characteristics merely to you to definitely consumer company from the a high price, and you can selling auditing characteristics to two consumer businesses on a lower life expectancy price. Keep in mind one to auditor 2’s cost of getting auditing functions grows in just how many audit subscribers, and therefore the consumer firms are not too heterogeneous (presumption from inside the ). This implies that auditor 2’s costs function may vary way more on the quantity of subscribers offered than that have audit quality per se. Then, the fresh allowance from review subscribers is dependent on auditor 2’s choices regarding review quality on , so the harmony most comes down to the fresh tradeoffs affecting auditor 2’s review rates. And that, when the auditor 2’s audit costs was lower ( , such as region ), auditor dos is the best of attempting to sell low-high quality auditing characteristics so you can one another buyer providers and also at a reduced price. To the contrary, when the auditor 2’s review rates is large ( , as in part ), auditor 2 is most beneficial of promoting auditing properties merely to visitors organization which have a top review high quality within increased commission. The fresh new balance higher review top quality, into the per case catches a value-improving top quality geared towards auditor 2’s limited client. The new charge from inside the for each case are ready, while the discussed above, to help you discourage website subscribers deviating away from auditor dos so you can auditor step one, depending on auditor step one asking the highest percentage your low-chance buyer will incur.

Auditor 2’s review top quality, , and you may amount of review subscribers, , is actually negatively correlated, in this a boost in regarding below to over grounds so you can fall off in order to increase. More over, expands inside auditor 1’s audit costs, , and also in client ‘s the reason risk, , and therefore imply that a rise in or in can get improve and drop off .

An inexpensive from review quality suggests auditor dos covers more website subscribers however, at the a reduced review top quality. A top price of review high quality suggests the alternative. Auditor 2’s audit top quality and you can visibility are negatively coordinated while the auditor dos chooses sometimes setting a high quality and you may charges a great high rate so you can buyer organization just or even lay less quality and sell review services in order to clients and you may . Also, a rise in auditor 1’s review rates or in visitors ‘s the reason team risk causes more substantial boost in auditor 2’s review lease when auditor dos deal audits in order to customers and you will compared to when auditor 2 offers audit so you can buyer only.

We outline this make adopting the corollary

The result in Corollary 1 talks on section made by auditor 2 merely. Which, the brand new feeling out-of a general change in auditor 2’s review top quality for the average review quality is confusing. In fact, a boost in auditor 2’s review quality, if the of this consumer agency switching to the low quality auditor step one, minimizes buyer ‘s the reason review high quality, which implies you to mediocre review high quality on the market are surely or adversely correlated with auditor 2’s level of audit clients.