Incompatibility and Investment in ATM Networks

28 Pages Posted: 12 Dec 2006

See all articles by Timothy H. Hannan

Timothy H. Hannan

Board of Governors of the Federal Reserve System

Ron Borzekowski

Yale University

Date Written: October 2006

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.

Keywords: ATM networks, banks, compatibility

JEL Classification: G21, L15

Suggested Citation

Hannan, Timothy and Borzekowski, Ron, Incompatibility and Investment in ATM Networks (October 2006). FEDS Working Paper No. 2006-36, Available at SSRN: https://ssrn.com/abstract=951208 or http://dx.doi.org/10.2139/ssrn.951208

Timothy Hannan (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States
202-452-2919 (Phone)
202-452-3819 (Fax)

Ron Borzekowski

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

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