Working Paper: NBER ID: w10774
Authors: Christopher R. Knittel; Victor Stango
Abstract: Incompatibility in markets with indirect network effects can affect prices if consumers value "mix and match" combinations of complementary network 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 (which are bundled with deposit accounts) and other banks' ATM machines. A series of hedonic regressions suggests that incompatibility strengthens the relationship between deposit account pricing and own ATMs, and weakens the relationship between deposit account pricing and competitors' ATMs. The effects of incompatibility are stronger in areas with high population density, suggesting that high travel costs increase both the strength of network effects and the importance of incompatibility in ATM markets.
Keywords: network effects; ATMs; pricing; incompatibility; banking
JEL Codes: L1; L5; L8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| incompatibility (L15) | weaker correlation with deposit account prices (G19) |
| incompatibility (L15) | stronger relationship with own ATMs and deposit account pricing (G21) |
| doubling total number of ATMs available (E59) | increase in deposit account prices (G21) |
| high population density (R23) | stronger effects of incompatibility (L15) |