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Compatibility and pricing with indirect network effects: evidence from ATMs

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  • Christopher R. Knittel
  • Victor Stango

Abstract

Incompatibility in markets with indirect network effects can reduce consumers’ willingness to pay if they value “mix and match” combinations of complementary network components. For integrated firms selling complementary components, incompatibility should also strengthen the demand-side link between components. In this paper, we examine the effects of incompatibility using data from a classic market with indirect network effects: Automated Teller Machines (ATMs). Our sample covers a period during which higher ATM fees increased incompatibility between ATM cards and other banks’ ATM machines. We find that incompatibility led to lower willingness to pay for deposit accounts. We also find that incompatibility benefited firms with large ATM fleets.

Suggested Citation

  • Christopher R. Knittel & Victor Stango, 2003. "Compatibility and pricing with indirect network effects: evidence from ATMs," Working Paper Series WP-03-33, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-03-33
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.
    3. Knittel, Christopher R. & Stango, Victor, 2011. "Strategic incompatibility in ATM markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2627-2636, October.
    4. Goddard, John & Molyneux, Philip & Wilson, John O.S. & Tavakoli, Manouche, 2007. "European banking: An overview," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1911-1935, July.
    5. Simon Loertscher & Yves Schneider, 2005. "Switching Costs, Firm Size, and Market Structure," SOI - Working Papers 0508, Socioeconomic Institute - University of Zurich.
    6. 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.
    7. Snellman, Heli, 2006. "Automated teller machine network market structure and cash usage," Scientific Monographs, Bank of Finland, number 2006_038, November.
    8. César Orosco, 2007. "Random utility models of demand for the U.S. commercial banking industry," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 22(2), pages 47-74, December.
    9. 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.
    10. 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.
    11. 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).
    12. Christopher R. Knittel & Victor Stango, 2009. "HOW DOES INCOMPATIBILITY AFFECT PRICES?: EVIDENCE FROM ATM'S -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 57(3), pages 557-582, September.
    13. Sobolewski, Maciej & Czajkowski, MikoŁaj, 2012. "Network effects and preference heterogeneity in the case of mobile telecommunications markets," Telecommunications Policy, Elsevier, vol. 36(3), pages 197-211.
    14. 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.
    15. 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.
    16. 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.
    17. 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.
    18. 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.
    19. repec:bof:bofrdp:urn:nbn:fi:bof-201511261452 is not listed on IDEAS
    20. Gautam Gowrisankaran & John Krainer, 2005. "Bank ATMs and ATM surcharges," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec16.

    More about this item

    Keywords

    Automated tellers;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L8 - Industrial Organization - - Industry Studies: Services

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