As opposed to NAS limitations, auditor dos in addition to agent bring NAS in the pricing while they engage in undifferentiated Bertrand competition

As opposed to NAS limitations, auditor dos in addition to agent bring NAS in the pricing while they engage in undifferentiated Bertrand competition

Corollary step one

Lemma step one ensures that, missing NAS restrictions, the fresh NAS industry will not connect to the newest review market.18 18 Remember that establishing provides modeled elsewhere, eg versatility threats otherwise studies spillovers, do crack this freedom. Indeed, undifferentiated Bertrand battle regarding NAS sector means auditor dos never produces NAS read here rents in the place of NAS limitations.

  • (i) In the event that , then auditor dos offers auditing features so you can consumer enterprises and you can , and you will auditor 1 deal auditing services to buyer company . Auditor dos determines audit high quality and you will establishes audit charge .
  • (ii) Or even, in the event the , then auditor 2 deal auditing qualities in order to consumer enterprise and you can auditor step one carries auditing qualities so you can customer providers and you will . Auditor dos decides review quality and you can kits audit fees .

Auditor 2 faces an excellent tradeoff ranging from promoting auditing features in order to that client company at a top speed, and you will promoting auditing attributes to help you a couple of customer enterprises at the a reduced rate. Bear in mind one to auditor 2’s cost of getting auditing services expands into the the number of review members, and therefore the consumer agencies aren’t as well heterogeneous (assumption within the ). This simply means one auditor 2’s cost form varies much more into number of readers supported than simply with review quality by itself. Further, brand new allowance away from audit website subscribers will depend on auditor 2’s options of audit top quality during the , so the equilibrium extremely comes down to this new tradeoffs that affect auditor 2’s audit prices. And this, if the auditor 2’s review prices is actually lower ( , such as part ), auditor 2 is best off selling reasonable-top quality auditing properties in order to one another consumer enterprises at a reduced price. Quite the opposite, when the auditor 2’s audit cost try highest ( , as in area ), auditor 2 is better of selling auditing characteristics only to consumer organization having increased audit high quality in the a higher fee. New equilibrium higher review quality, in for every instance captures a respect-maximizing quality geared towards auditor 2’s limited visitors. New charges for the for every case are prepared, due to the fact talked about more than, so you can discourage website subscribers deviating of auditor 2 so you’re able to auditor step 1, conditional on auditor step one asking the best commission that the lower-exposure customer commonly sustain.

Auditor 2’s review quality, , and you may level of audit website subscribers, , is negatively correlated, in that a boost in away from below so you can above reasons in order to drop-off and raise. Furthermore, increases when you look at the auditor 1’s review pricing, , and also in visitors is why chance, , which signify an increase in or perhaps in get raise and fall off .

An inexpensive regarding review quality suggests auditor dos talks about even more subscribers however, during the less audit high quality. A top cost of review high quality means the opposite. Auditor 2’s audit high quality and you may exposure is actually adversely synchronised since the auditor 2 determines possibly to create a top quality and you may fees a good highest rates to help you consumer organization just or perhaps to put a reduced high quality market review attributes in order to customers and you can . In addition, a rise in auditor 1’s audit prices or in visitors is why company exposure contributes to a more impressive rise in auditor 2’s audit rent when auditor dos carries audits so you can clients and you will as compared to whenever auditor dos sells review to consumer only.

I describe which make the following corollary

The result in Corollary step one speaks to the sector served by auditor 2 merely. And this, this new effect off a change in auditor 2’s audit quality for the mediocre review quality is not clear. In fact, an increase in auditor 2’s audit quality, if associated with the customer corporation switching to the lower high quality auditor 1, reduces consumer is why audit high quality, which suggests one average audit quality in the business is generally certainly or negatively synchronised that have auditor 2’s level of audit website subscribers.