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Product innovation and network survival in the U.S. ATM and debit card network industry

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Author Info

  • Fumiko Hayashi
  • Zhu Wang

Abstract

This paper studies product innovation and firm survival in the U.S. ATM/debit card industry. The industry started with a few shared ATM networks in the early 1970s. The number of networks grew quickly up until the mid 1980s, but then declined sharply. We construct a theoretical model based on Jovanovic and MacDonald (1994). In contrast to their model focusing on cost-saving technological innovation, our model shows a major product innovation may also trigger the shakeout. The theoretical predictions are tested using a novel dataset on network entry, exit, size, location, ownership and product choices. The findings suggest introducing the point of sale debit function in the mid 1980s played an important role driving the network consolidation. Unlike previous studies, we find little advantage of being early industry entrants. Rather, due to network effects in the industry, large networks had better chance to adopt the product innovation and survive the shakeout. ; Original title: Product innovation and firm survival in a network industry ; Also issued as a Payments System Research Working Paper

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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 08-14.

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Date of creation: 2009
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Handle: RePEc:fip:fedkrw:rwp08-14

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References

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  1. Nadia Massoud & Dan Bernhardt, 2002. ""Rip-Off" ATM Surcharges," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 96-115, Spring.
  2. Boyan Jovanovic & Glenn MacDonald, 1993. "The Life-Cycle of a Competitive Industry," NBER Working Papers 4441, National Bureau of Economic Research, Inc.
  3. Hannan, Timothy H., 2007. "ATM surcharge bans and bank market structure: The case of Iowa and its neighbors," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1061-1082, April.
  4. James J. McAndrews, 1991. "The evolution of shared ATM networks," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 3-16.
  5. Timothy H. Hannan & Elizabeth K. Kiser & Robin A. Prager & James J. McAndrews, 2001. "To surcharge or not to surcharge: an empirical investigation of ATM pricing," Finance and Economics Discussion Series 2001-38, Board of Governors of the Federal Reserve System (U.S.).
  6. Garth Saloner & Andrea Shepard, 1995. "Adoption of Technologies with Network Effects: An Empirical Examination of the Adoption of Teller Machines," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 479-501, Autumn.
  7. Zhu Wang, 2005. "Technological innovation and market turbulence: the dot-com experience," Payments System Research Working Paper PSR WP 05-02, Federal Reserve Bank of Kansas City.
  8. Rochet, Jean-Charles & Tirole, Jean, 2003. "Platform Competition in Two-Sided Markets," IDEI Working Papers 152, Institut d'Économie Industrielle (IDEI), Toulouse.
  9. Knittel Christopher R. & Stango Victor, 2008. "Incompatibility, Product Attributes and Consumer Welfare: Evidence from ATMs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-42, January.
  10. Gautam Gowrisankaran & John Krainer, 2006. "The Welfare Consequences of ATM Surcharges: Evidence from a Structural Entry Model," NBER Working Papers 12443, National Bureau of Economic Research, Inc.
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  12. Mcandrews James J., 2003. "Automated Teller Machine Network Pricing - A Review of the Literature," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-13, June.
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  14. Matutes, Carmen & Padilla, A. Jorge, 1994. "Shared ATM networks and banking competition," European Economic Review, Elsevier, vol. 38(5), pages 1113-1138, May.
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  16. Hannan, Timothy H & McDowell, John M, 1984. "Market Concentration and the Diffusion of New Technology in the Banking Industry," The Review of Economics and Statistics, MIT Press, vol. 66(4), pages 686-91, November.
  17. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-53, September.
  18. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June.
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  20. Hannan Timothy H. & Borzekowski Ron, 2007. "Incompatibility and Investment in ATM Networks," Review of Network Economics, De Gruyter, vol. 6(1), pages 1-15, March.
  21. Christopher R. Knittel & Victor Stango, 2009. "HOW DOES INCOMPATIBILITY AFFECT PRICES?: EVIDENCE FROM ATM'S -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 57(3), pages 557-582, 09.
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  23. repec:rje:randje:v:37:y:2006:3:p:692-719 is not listed on IDEAS
  24. Zhu Wang, 2008. "Income Distribution, Market Size and the Evolution of Industry," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 542-565, July.
  25. Fumiko Hayashi & Rick Sullivan & Stuart E. Weiner, 2006. "A guide to the ATM and debit card industry - 2006 update," Monograph, Federal Reserve Bank of Kansas City, number 2006agttaadci2, December.
  26. Steven Klepper & Elizabeth Graddy, 1990. "The Evolution of New Industries and the Determinants of Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 27-44, Spring.
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Cited by:
  1. Oz Shy & Zhu Wang, 2008. "Why do card issuers charge proportional fees?," Research Working Paper RWP 08-13, Federal Reserve Bank of Kansas City.

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