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Compatibility and Pricing with Indirect Network Effects: Evidence from ATMs

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  • Christopher Knittel
  • Victor Stango

    (Department of Economics, University of California Davis)

Abstract

Incompatibility in markets with indirect network e¤ects can a¤ect prices if consumers value?mix and match?combinations of complementary network components. In this paper, we exam-ine the e¤ects of incompatibility using data from a classic market with indirect network e¤ects:Automated Teller Machines (ATMs). Our sample covers a period during which higher ATMfees increased incompatibility between ATM cards (which are bundled with deposit accounts)and other banks?ATM machines. A series of hedonic regressions suggests that incompatibilitystrengthens the relationship between deposit account pricing and own ATMs, and weakens therelationship between deposit account pricing and competitors?ATMs. The e¤ects of incom-patibility are stronger in areas with high population density, suggesting that high travel costsincrease both the strength of network e¤ects and the importance of incompatibility in ATMmarkets.

Suggested Citation

  • Christopher Knittel & Victor Stango, 2005. "Compatibility and Pricing with Indirect Network Effects: Evidence from ATMs," Working Papers 35, University of California, Davis, Department of Economics.
    • Handle: RePEc:cda:wpaper:35
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    More about this item

    Keywords

    atm; network effects;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L8 - Industrial Organization - - Industry Studies: Services

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