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Network externalities in the market for electronic check payments

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  • Joanna Stavins

Abstract

Network externalities exist when the value of a good or service to a potential consumer increases with the number of other consumers using the same product. For a service characterized by network externalities, adoption and use can be below the socially optimal level because consumers or firms do not take into account the positive effect of their own use on others' use. A firm may decide not to adopt a technology because its private net benefits from adoption are negative, even though net social benefits may be positive. There could be at least two reasons why electronic check products have been relatively slow to spread: Financial institutions (or their customers) do not find electronic check products sufficiently attractive, and network externalities slow down the rate of adoption of these services. If network externalities are the cause of the slow rate of adoption, then there may be a reason to provide additional incentives to depository institutions to encourage their use. ; Using data on individual banks' use of Federal Reserve electronic check services, the author tests whether local network externalities exist in electronic check services provided by the Federal Reserve. Two tests are applied: a clustering test and a market concentration test. The author finds no evidence that local network externalities exist in the market for electronic check services.

Suggested Citation

  • Joanna Stavins, 2003. "Network externalities in the market for electronic check payments," New England Economic Review, Federal Reserve Bank of Boston, pages 19-30.
  • Handle: RePEc:fip:fedbne:y:2003:p:19-30
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    References listed on IDEAS

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    1. 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.
    2. Joanna Stavins, 2002. "Who uses electronic check products: a look at depository institutions," New England Economic Review, Federal Reserve Bank of Boston, issue Q 3, pages 3-16.
    3. 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 686-691, November.
    4. Hannan, Timothy H & McDowell, John M, 1990. "The Impact of Technology Adoption on Market Structure," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 164-168, February.
    5. John A. Weinberg, 1997. "The organization of private payment networks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 25-44.
    6. Geoffrey R. Gerdes & Jack K. Walton, 2002. "The use of checks and other noncash payment instruments in the United States," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Aug, pages 360-374.
    7. David Genesove, 1999. "The Adoption of Offset Presses in the Daily Newspaper Industry in the United States," NBER Working Papers 7076, National Bureau of Economic Research, Inc.
    8. Brian Mantel & Timothy McHugh, 2001. "Competition and innovation in the consumer e-payments market? considering the demand, supply, and public policy issues," Occasional Paper; Emerging Payments EPS-2001-4, Federal Reserve Bank of Chicago.
    9. William Roberds, 1998. "The impact of fraud on new methods of retail payment," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 42-52.
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    Keywords

    Electronic funds transfers;

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