In place of NAS limits, auditor 2 additionally the consultant offer NAS on cost while they do undifferentiated Bertrand competition

In place of NAS limits, auditor 2 additionally the consultant offer NAS on cost while they do undifferentiated Bertrand competition

Corollary step 1

Lemma step 1 implies that, absent NAS restrictions, brand new NAS sector does not connect with the new review business.18 18 Remember that introducing has modeled elsewhere, such as for instance freedom threats or degree spillovers, do crack it freedom. In fact, undifferentiated Bertrand race on the NAS industry means that auditor dos never ever earns NAS rents in place of NAS limits.

  • (i) If the , following auditor 2 offers auditing services in order to buyer enterprises and you may , and auditor step one sells auditing attributes to customer business . Auditor dos determines audit top quality and you can set audit charge .
  • (ii) If you don’t, in the event that , upcoming auditor dos offers auditing properties in order to visitors corporation and you will auditor 1 sells auditing features so you can visitors providers and . Auditor dos chooses audit top quality and you can establishes review charge .

Auditor 2 face a great tradeoff anywhere between offering auditing qualities just to that buyer agency during the increased price, and you can offering auditing features to help you a couple client firms at the a lower rates. Recall one auditor 2’s cost of providing auditing services expands inside the exactly how many audit website subscribers, which the consumer companies aren’t as well heterogeneous (presumption in ). What this means is you to auditor 2’s costs function varies alot more on the amount of website subscribers offered than just having audit high quality by itself. Further, the fresh new allotment away from review website subscribers hinges on auditor 2’s selection of audit quality on , so that the harmony extremely boils down to the latest tradeoffs affecting auditor 2’s review cost. Hence, in the event that auditor 2’s audit cost was reasonable ( , like in region ), auditor 2 is best out-of selling reduced-high quality auditing features in order to each other consumer providers as well as a reduced rate. Quite the opposite, in the event the auditor 2’s audit pricing are highest ( , as with area ), auditor 2 is better off attempting to sell auditing qualities just to consumer agency with increased audit high quality from the a top commission. The newest equilibrium highest audit top quality, during the each circumstances captures a value-enhancing quality geared towards auditor 2’s marginal customer. The new charge from inside the for every single instance are set, since the talked about above, so you can discourage subscribers deviating out of auditor 2 in order to auditor step one, depending on auditor step 1 asking the best percentage your reasonable-chance client have a tendency to bear.

Auditor 2’s review quality, , and you can quantity of review readers, , try adversely coordinated, in this a rise in out of less than so you’re able to a lot more than reasons so you can fall off and also to raise. Moreover, grows inside the auditor 1’s review pricing, , along with client ‘s the reason risk, , and that mean that a rise in or even in could possibly get increase and you may disappear .

A low cost off audit high quality indicates auditor 2 covers far more members but at the a lower review top quality. A top cost of review quality ways the exact opposite. Auditor 2’s audit quality and publicity is adversely coordinated since auditor dos decides often setting a top quality and you will charge a beneficial highest rates in order to consumer firm simply or even to set a lesser high quality and sell audit functions to members and you can . Additionally, a boost in auditor 1’s audit pricing or even in customer ‘s team chance causes more substantial upsurge in auditor 2’s review lease when auditor dos offers audits so you can members and you will compared to the when auditor dos deal review so you can customer simply.

I summary it make the following the corollary

The effect in the Corollary step 1 talks to the section served by auditor 2 just. And that, the brand new perception off a modification of auditor 2’s review quality to the mediocre review quality was ambiguous. In fact, an increase in auditor 2’s audit high quality, when the for the customer company using the reduced top quality auditor 1, reduces consumer is the reason audit top quality, which suggests one to average audit high quality in the market is seriously or negatively coordinated that have auditor 2’s number of audit subscribers.

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