Keywords: ATM networks, banks, compatibility
Abstract: The literature on network industries and network effects notes that incompatibility
across rival systems can influence firms' incentives to invest in product changes
that are beneficial to the consumer. We investigate this phenomenon in the case of
bank ATM networks, where the number of ATM locations serves as the measure of product
quality and surcharge fees serve as an index of incompatibility. Using as a natural
experiment the lifting of a surcharge ban in Iowa (and not in neighboring states),
we find that the associated increase in incompatibility for Iowa banks caused a
substantial increase in the number of ATM locations offered to customers.
This effect is found to be larger (in percentage terms) for larger banks than for smaller ones.
Full paper (179 KB PDF)
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Last update: November 9, 2006