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Compatibility and Pricing with Indirect Network Effects: Evidence from ATMs

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Knittel, Christopher (U of California, Davis)
Stango, Victor (Dartmouth College)

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Abstract

Incompatibility in markets with indirect network effects can affect prices if consumers value "mix and match" combinations of complementary network components. In this paper, we examine the effects of incompatibility using data from a classic market with indirect network effects: Automated Teller Machines (ATMs). Our sample covers a period during which higher ATM fees increased incompatibility between ATM cards (which are bundled with deposit accounts) and other banks' ATM machines. A series of hedonic regressions suggests that incompatibility strengthens the relationship between deposit account pricing and own ATMs, and weakens the relationship between deposit account pricing and competitors' ATMs. The effects of incompatibility are stronger in areas with high population density, suggesting that high travel costs increase both the strength of network effects and the importance of incompatibility in ATM markets.

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Paper provided by University of California at Davis, Department of Economics in its series Working Papers with number 05-25.

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Handle: RePEc:ecl:ucdeco:05-25

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  13. Timothy H. Hannan & Elizabeth K. Kiser & Robin A. Prager & James J. McAndrews, 2003. "To Surcharge or Not to Surcharge: An Empirical Investigation of ATM Pricing," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 990-1002, 09. [Downloadable!] (restricted)
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  15. Gautam Gowrisankaran & John Krainer, 2004. "The welfare consequences of ATM surcharges: evidence from a structural entry model," Working Papers in Applied Economic Theory 2005-01, Federal Reserve Bank of San Francisco. [Downloadable!]
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  16. Matutes, Carmen & Regibeau, Pierre, 1992. "Compatibility and Bundling of Complementary Goods in a Duopoly," Journal of Industrial Economics, Blackwell Publishing, vol. 40(1), pages 37-54, March. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gautam Gowrisankaran & John Krainer, 2004. "The welfare consequences of ATM surcharges: evidence from a structural entry model," Working Papers in Applied Economic Theory 2005-01, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  2. Christopher R. Knittel & Victor Stango, 2006. "Strategic Incompatibility in ATM Markets," NBER Working Papers 12604, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Timothy H. Hannan, 2005. "ATM surcharge bans and bank market structure: the case of Iowa and its neighbors," Finance and Economics Discussion Series 2005-46, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  4. Feenstra, Robert & Knittel, Christopher, 2004. "Re-assessing the U.S. Quality Adjustment to Computer Prices: The Role of Durability and Changing Software," Working Papers 06-32, University of California at Davis, Department of Economics. [Downloadable!]
    Other versions:
  5. Gautam Gowrisankaran & John Krainer, 2005. "Bank ATMs and ATM surcharges," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Dec 16. [Downloadable!]
  6. Milne , Alistair, 2005. "What's in it for us? Network effects and bank payment innovation," Research Discussion Papers 16/2005, Bank of Finland. [Downloadable!]
  7. César Orosco, 2007. "Random utility models of demand for the U.S. commercial banking industry," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Economics Department, vol. 22(2), pages 47-74, December. [Downloadable!]
  8. Simon Loertscher & Yves Schneider, 2005. "Switching Costs, Firm Size, and Market Structure," Diskussionsschriften dp0515, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
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  9. Christopher R. Knittel & Victor Stango, 2004. "Incompatibility, Product Attributes and Consumer Welfare: Evidence from ATMs," Working Papers 04-06, NET Institute, revised Oct 2004. [Downloadable!]
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