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Quantifying Equilibrium Network Externalities in the ACH Banking Industry

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Author Info
Gautam Gowrisankaran () (John M. Olin School of Business, Washington University in St. Louis and NBER)
Daniel A. Ackerberg () (University of Arizona and NBER)
Abstract

We seek to estimate the causes and magnitudes of network externalities for the automated clearinghouse (ACH) electronic payments system, using a panel data set on individual bank usage of ACH. We construct an equilibrium model of consumer and bank adoption of ACH in the presence of a network. The model identifies network externalities from correlations of changes in usage levels for banks within a network, from changes in usage following changes in market concentration or sizes of competitors and from adoption decisions of banks outside the network with small branches in the network, and can separately identify consumer and bank network effects. We structurally estimate the parameters of the model by matching equilibrium behavior to the data, using simulated maximum likelihood and a data set of localized networks, and use a bootstrap to recover confidence intervals. The parameters are estimated with high precision and fit various moments of the data reasonably well. We find that most of the impediment to ACH adoption is due to large consumer fixed costs of adoption. The deadweight loss from the network externality is moderate: the optimal number of ACH transactions is about 16% higher than the equilibrium level.

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Paper provided by NET Institute in its series Working Papers with number 03-06.

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Length: 41 pages
Date of creation: Sep 2003
Date of revision: Sep 2003
Handle: RePEc:net:wpaper:0306

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  3. Andrea Moro, 2003. "The Effect Of Statistical Discrimination On Black-White Wage Inequality: Estimating A Model With Multiple Equilibria," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 467-500, 05. [Downloadable!] (restricted)
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  5. Topa, Giorgio, 2001. "Social Interactions, Local Spillovers and Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 68(2), pages 261-95, April.
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  7. Brock, William A & Durlauf, Steven N, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Blackwell Publishing, vol. 68(2), pages 235-60, April.
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  10. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 531-42, July. [Downloadable!] (restricted)
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  1. Marc Rysman, 2003. "Differentiation Across Standards and Adoption Failure in 56K Modems," Working Papers 03-12, NET Institute, revised Dec 2003. [Downloadable!]
  2. Elena Argentesi & Lapo Filistrucchi, 2007. "Estimating market power in a two-sided market: The case of newspapers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1247-1266. [Downloadable!]
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  3. Angelique Augereau & Shane Greenstein & Marc Rysman, 2004. "Coordination vs. Differentiation in a Standards War: 56K Modems," NBER Working Papers 10334, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Evans, David & Schmalensee, Richard, 2005. "The Economics of Interchange Fees and Their Regulation: An Overview," Working papers 18181, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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