The Effect of a Bidding Restriction on the Audit Services Market

Abstract

Central to debates about the audit services market is the effect of competition on auditor performance. The economic performance of auditors has been examined in studies of pricing, labor allocation, and concentration statistics. The purpose of this study is to document the price and quality effects of an unusual state-mandated market restriction that required nonprice competition and prohibited price competition among auditors. We adopt an industrial organization perspective, with particular emphasis on capture theory. Specifically, we analyze Section 473.317, Florida Statutes (Rule 21A24.03, Florida Administrative Code), which mandated that proposals to perform an audit not include fee information1 and specified the procedure to be used to select an external auditor. Basically, an auditee was required to rank prospective auditors in order of nonprice preference and