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The Welfare Consequences of ATM Surcharges: Evidence from a Structural Entry Model

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  • Gautam Gowrisankaran

    ()
    (John M. Olin School of Business, Washington University in St. Louis)

  • John Krainer

    ()
    (Federal Reserve Bank of San Francisco)

Abstract

We estimate a structural model of the market for automatic teller machines (ATMs) evaluate the implications of regulating ATM surcharges on ATM entry and consumer producer surplus. We estimate the model using data on firm and consumer locations, the parameters of the model by exploiting a source of local quasi–experimental variation, state of Iowa banned ATM surcharges during our sample period while the state of Minnesota not. We develop new econometric methods that allow us to estimate the parameters equilibrium models without computing equilibria. Monte Carlo evidence shows estimator performs well. We find that a ban on ATM surcharges reduces ATM entry percent, increases consumer welfare by about 10 percent and lowers producer profits percent. Total welfare remains about the same under regimes that permit or prohibit surcharges and is about 17 percent lower than the surplus maximizing level. This paper shed light on the theoretically ambiguous implications of free entry on consumer welfare for differentiated products industries in general and ATMs in particular.

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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 04-16.

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Length: 46 pages
Date of creation: Nov 2004
Date of revision: Nov 2004
Handle: RePEc:net:wpaper:0416

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  1. Hotz, V Joseph & Miller, Robert A, 1993. "Conditional Choice Probabilities and the Estimation of Dynamic Models," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 497-529, July.
  2. Christopher R. Knittel & Victor Stango, 2004. "Compatibility and Pricing with Indirect Network Effects: Evidence from ATMs," NBER Working Papers 10774, National Bureau of Economic Research, Inc.
  3. Elizabeth W. Croft & Barbara J. Spencer, 2003. "Fees and Surcharging in automatic teller machine networks: Non-bank ATM providers versus large banks," NBER Working Papers 9883, National Bureau of Economic Research, Inc.
  4. Thomas J. Holmes, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 667-705, August.
  5. Ariel Pakes & Michael Ostrovsky & Steven Berry, 2007. "Simple estimators for the parameters of discrete dynamic games (with entry/exit examples)," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 373-399, 06.
  6. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
  7. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, vol. 69(1), pages 201-09, January.
  8. Steven Berry & Joel Waldfogel, 1996. "Free Entry and Social Inefficiency in Radio Broadcasting," NBER Working Papers 5528, National Bureau of Economic Research, Inc.
  9. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
  10. Chernew, Michael & Gowrisankaran, Gautam & Fendrick, A. Mark, 2002. "Payer type and the returns to bypass surgery: evidence from hospital entry behavior," Journal of Health Economics, Elsevier, vol. 21(3), pages 451-474, May.
  11. Kenneth Y. Chay & Michael Greenstone, 1999. "The Impact of Air Pollution on Infant Mortality: Evidence from Geographic Variation in Pollution Shocks Induced by a Recession," NBER Working Papers 7442, National Bureau of Economic Research, Inc.
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Cited by:
  1. Timothy H. Hannan & Ron Borzekowski, 2006. "Incompatibility and investment in ATM networks," Finance and Economics Discussion Series 2006-36, Board of Governors of the Federal Reserve System (U.S.).
  2. 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.
  3. Fumiko Hayashi & Zhu Wang, 2009. "Product innovation and network survival in the U.S. ATM and debit card network industry," Research Working Paper RWP 08-14, Federal Reserve Bank of Kansas City.

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