Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Wednesday, November 13, 2019

Multimarket Contact and Mutual Forbearance in Audit Markets

Simon Dekeyser, KU Leuven - Department of Accountancy, Finance and Insurance (AFI), Ann Gaeremynck, KULeuven; KU Leuven, Faculty of Business and Economics (FEB), Students, W. Robert Knechel, University of Florida - Fisher School of Accounting, and Marleen Willekens, Katholieke Universiteit Leuven (KUL) identify Multimarket Contact and Mutual Forbearance in Audit Markets.

ABSTRACT: In this paper we argue that audit firms rationally consider the potential reactions of their rivals when deciding how fiercely to compete in a given market. Based on prior literature in the field of industrial organization (Bernheim and Whinston [1990]), we hypothesize that competing with the same audit firms across different industries within a geographical region (which we label “multi-industry contact”) leads to less (price) competition overall, which suggests mutual forbearance among rivals. As we characterize the audit market as a differentiated Bertrand oligopoly, pricing is a main strategic choice variable for audit firms. We predict and test whether the extent of multi-industry contact is positively associated with audit fees including several tight fixed effects specifications to rule out potential confounds. Based on a sample of 19,641 observations from 2004-2012, we find that the extent of multi-industry contact between audit firms is positively associated with audit fees controlling for inter-year, inter-industry, inter-geographical area, inter-client and inter-market segment heterogeneities. This evidence is consistent with mutual forbearance between audit firms. In supplementary tests, we find that the likelihood of client switching is negatively associated with multi-industry contact.

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