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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.

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  • 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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    2. Robert C. Feenstra & Christopher R. Knittel, 2009. "Re-Assessing the U.S. Quality Adjustment to Computer Prices: The Role of Durability and Changing Software," NBER Chapters,in: Price Index Concepts and Measurement, pages 129-160 National Bureau of Economic Research, Inc.
    3. Gautam Gowrisankaran & John Krainer, 2004. "The Welfare Consequences of ATM Surcharges: Evidence from a Structural Entry Model," Working Paper Series 2005-01, Federal Reserve Bank of San Francisco.
    4. Knittel, Christopher R. & Stango, Victor, 2011. "Strategic incompatibility in ATM markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2627-2636, October.
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    7. Vega, Milton & Ayllon, Roy & Chavez, Gonzalo, 2010. "Innovación En Los Sistemas De Pagos: El Caso Del Mercado De Transferencias De Crédito En El Peru," Working Papers 2010-010, Banco Central de Reserva del Perú.
    8. Snellman, Heli, 2006. "Automated teller machine network market structure and cash usage," Scientific Monographs, Bank of Finland, number 2006_038.
    9. César Orosco, 2007. "Random utility models of demand for the U.S. commercial banking industry," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 22(2), pages 47-74, December.
    10. Milne, Alistair, 2006. "What is in it for us? Network effects and bank payment innovation," Journal of Banking & Finance, Elsevier, vol. 30(6), pages 1613-1630, June.
    11. 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.
    12. Robert C. Feenstra & Christopher R. Knittel, 2009. "Reassessing the US Quality Adjustment to Computer Prices: The Role of Durability and Changing Software," NBER Chapters, in: Price Index Concepts and Measurement, pages 129-160, National Bureau of Economic Research, Inc.
    13. Mariotto, Carlotta & Verdier, Marianne, 2015. "Innovation and competition in Internet and mobile banking: an industrial organization perspective," Bank of Finland Research Discussion Papers 23/2015, Bank of Finland.
    14. Christopher R. Knittel & Victor Stango, 2009. "How Does Incompatibility Affect Prices?: Evidence From Atm'S," Journal of Industrial Economics, Wiley Blackwell, vol. 57(3), pages 557-582, September.
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    16. Grajek, Michal, 2010. "Estimating network effects and compatibility: Evidence from the Polish mobile market," Information Economics and Policy, Elsevier, vol. 22(2), pages 130-143, May.
    17. Mariotto, Carlotta & Verdier, Marianne, 2015. "Innovation and competition in Internet and mobile banking: an industrial organization perspective," Research Discussion Papers 23/2015, Bank of Finland.
    18. Michal Grajek, 2003. "Estimating Network Effects and Compatibility in Mobile Telecommunications," CIG Working Papers SP II 2003-26, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    19. Miko?aj Czajkowski & Maciej Sobolewski, 2011. "Measuring network effects in mobile telecommunications markets with stated-preference valuation methods," International Journal of Management and Network Economics, Inderscience Enterprises Ltd, vol. 2(2), pages 197-215.
    20. Snellman, Heli, 2006. "Automated teller machine network market structure and cash usage," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number sm2006_038, December.
    21. Knittel, Christopher R. & Stango, Victor, 2011. "Strategic incompatibility in ATM markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2627-2636, October.
    22. Carlotta MARIOTTO & Marianne VERDIER, 2015. "Innovation and Competition in Internet and Mobile Banking: an Industrial Organization Perspective," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(99), pages 129-146, 3rd quart.
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    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L8 - Industrial Organization - - Industry Studies: Services

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