Price discrimination strategy in oligopoly market: evidence from auditors

Abstract

Purpose The purpose of this paper is to examine the behavior of industry expert auditors in relation to clients with high growth potential, focusing on audit fee discounts, audit quality and the future collection of non-audit fees. By investigating the strategic use of audit fee discounts as an investment in future engagements, the paper aims to understand how auditors with industry expertise leverage their market power and specialized knowledge. This study contributes to the literature on auditor–client relationships, exploring how auditors’ economic incentives and industry-specific knowledge influence their pricing and service provision strategies. Design/methodology/approach This study adopts a quantitative approach, using archival data to examine the pricing and audit quality decisions of industry expert auditors. Auditors are identified based on their industry expertise, defined using the standard industrial classification two-digit code. Client growth potential is measured through residuals from a cross-sectional regression of actual growth rates on growth determinants by industry and year. The analysis investigates the relationship between audit fee discounts, going concern opinions and non-audit fees. Robustness tests, including entropy balancing and change analysis, are employed to address potential endogeneity and ensure the reliability of the findings. Findings The findings indicate that industry expert auditors offer audit fee discounts to clients with high growth potential. This discounting behavior is linked to the auditors’ strategic goal of securing future non-audit engagements, with the expectation that growing clients will demand more non-audit services over time. In addition, industry expert auditors are less likely to issue a going concern opinion for high-growth clients. Further analysis reveals that these auditors collect more non-audit fees in subsequent years from these clients, reinforcing the compensatory dynamic between audit and non-audit services. Robustness tests confirm the consistency of the results. Originality/value This paper provides new insights into the behavior of industry expert auditors, particularly regarding the use of audit fee discounts as a strategic investment in future non-audit services. By linking audit fee discounting to client growth potential, the study enhances understanding of the financial dynamics between auditors and high-growth clients. The findings contribute to the literature on auditor independence, market power and audit quality, highlighting the implications of economic incentives and industry expertise for audit pricing and service provision. This study fills a gap in research by directly examining the long-term financial benefits of audit fee discounting in the audit industry.