Shared Ownership and Pricing in a Network Switch

Posted: 5 Aug 2015

See all articles by James McAndrews

James McAndrews

Wharton Financial Institutions Center

Rafael Rob

University of Pennsylvania - Department of Economics

Date Written: October 4, 1996

Abstract

We observe that many wholesale switches in automated teller machine (ATM) networks are jointly owned by their members and that this tends to occur more frequently when the wholesale industry is highly concentrated. We also observe that network switches are ‘natural monopolies’, their costs being largely fixed and their demand exhibiting substantial network externalities. Motivated by these observations, we model the competition for members between wholesale switches and the role joint ownership can play in attracting members. The model analyzes both the adoption decision (which network a bank chooses to join) and the subsequent pricing of switch and ATM services. We compare competition between two solely owned switches with competition between one solely owned and one jointly owned switch. Our analysis shows that a more concentrated structure results under the latter and that retail prices are higher. This calls into question the leniency of antitrust policy toward jointly owned structures.

Keywords: Network pricing

JEL Classification: L2, L4

Suggested Citation

McAndrews, James and Rob, Rafael, Shared Ownership and Pricing in a Network Switch (October 4, 1996). International Journal of Industrial Organization, Vol. 14, No. 1, 1996, Available at SSRN: https://ssrn.com/abstract=2639654

James McAndrews (Contact Author)

Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States
9176090086 (Phone)
19104 (Fax)

Rafael Rob

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6775 (Phone)
215-573-2057 (Fax)

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