“Low‐Balling” and Efficiency in a Two‐Period Specialization Model of Auditing Competition*
构建两期专业化模型，分析启动成本如何影响审计竞争，发现低价揽客是竞争的自然结果，但仅出现在激烈竞争的市场细分中；禁止低价揽客会提高审计费用和利润，但能促使专业化更高效，降低总审计成本。
Abstract This paper develops a simple, two‐period specialization model to analyze the effect of start‐up costs on auditing competition. Audit firms in the model make strategic specialization and pricing decisions. Through specialization, an audit firm achieves a comparative cost advantage over its competitors for all clients whose characteristics are closer to its area of specialization. This comparative cost advantage is further fortified by the presence of start‐up costs. As a result, each audit firm obtains some market power and is able to price‐discriminate across clients by offering “specialization‐and‐relationship‐specific” audit fee schedules. This paper demonstrates that the practice of “low‐balling” is a natural consequence of competition among audit firms. However, low‐balling occurs only in a certain market segment where audit firms compete fiercely. This paper also shows that a policy of banning low‐balling acts as a substitute for the commitment of the audit firms to partially collude their pricing policies and results in increased profits for audit firms and increased fees. However, it also results in audit firms choosing specializations in a more efficient way, thereby reducing total auditing costs.