Working Paper

Incompatibility and investment in ATM networks

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: Automated tellers; Banks and banking - Automation;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2006

Number: 2006-36