Endogenous ATM Networks and Pricing

Abstract

We develop a novel spatial model in which we endogenize the choice by banks of both (i) how to price banking services, and (ii) how many ATMs to provide. The feature of the spatial model that makes it possible to solve for equilibrium pricing and location choices is that consumers receive bank-specific location shocks. Consistent with the recent proliferation of ATMs and findings in the empirical literature, we find that in equilibrium, banks over-provide ATMs. Banks do so because they extract profits more efficiently from bank members through bank account fees than from ATM use by members (depositors) of other banks,and a more developed ATM network raises the attraction of establishing an account with the bank. Surprisingly,over-provision of ATMs rises when the ATM network choice is made prior to pricing decisions.

Keywords: ATMs, ATM surcharges, ATM network , Retail payment system