We develop a measure to capture an audit firm’s competitive position in a local audit market based on the transaction costs of changing audit firms included in DeAngelo’s (1981) multi-period audit pricing model. Audit markets in the U.S. and elsewhere have clearly become more concentrated since the late 1980s after several rounds of consolidation among the largest public accounting firms (Ferguson et al., 2014). The nature of competition among audit firms has been of concern to regulators (e.g., Subcommittee on Reports, Accounting and Management of the Commission on Government Operations U.S. Senate, 1977; Government Accountability Office [GAO], 2003, 2008) and of interest to researchers (e.g., Dopuch and Simunic, 1980). Regulators’ concerns center on the possibility that a lack of competition among audit firms will lead to higher audit prices, lower audit quality, and hence a lower quality of financial reporting by companies. Auditor competition is therefore an important issue, but to understand the nature of competition, it is essential for auditors’ competitive positions to be properly measured. We develop our measure based on the effects of variations in the size of suppliers (audit firms) in a market on audit service production and pricing. It is well known that client companies retain their audit firms for multiple years, rather than changing them every few years, presumably because the transaction costs (i.e., audit firm learning costs and client-incurred switching costs) of audit firm change are non-trivial. This leads to the multi-period pricing of audit services analyzed in DeAngelo (1981), Magee and Tseng (1990), and Sabac and Simunic (2001). We argue that the competitive pressure on any incumbent audit firm’s fees depends fundamentally upon the ease with which the audit firm’s clients can switch to a competing audit firm. If the transaction costs are low, the ability of the incumbent audit firm to extract economic rents from clients is limited;1 conversely, high costs of changing auditors give an incumbent auditor greater pricing power. We conjecture that transaction costs are decreasing in the relative operational size differences among competing audit firms in a market. The greater the operational size difference between the largest available supplier (auditor) and the incumbent supplier, the lower will be the transaction costs for a client of the incumbent firm to switch to the largest supplier and hence the lower the incumbent’s audit fee.