Strategic responses to regulatory threat in the credit card market

In November 1991, federal lawmakers threatened to place a binding cap on credit card interest rates. I find that credit card rates declined following the regulatory threat, more so for larger and more politically visible credit card issuers. A set of stock market event studies reveals that interest rate cuts announced after the threat led to positive abnormal returns, both for announcing issuers and their rivals. This pattern does not exist for similar rate cuts made outside the period of regulatory threat. The results suggest that firms may experience private benefits to price-cutting when doing so mitigates regulatory threat, and spillover benefits when another firm cuts prices in order to ease regulatory threat.Credit cards ; Consumer credit - Law and legislation

The economics of standards: public policy and market performance

Economic conditions ; Payment systems

Supplier switching and outsourcing

We examine supplier switching decisions using a unique database that tracks firms (credit unions) and their suppliers (data processing vendors); the data are in a panel, allowing us to track supplier switching decisions at a new level of detail. We focus on two sets of relationships. First, we estimate a model that relates supplier choices and switching to a variety of buyer- and supplier-specific characteristics. Second, we examine how> switching depends on the vendor relationships that credit unions choose: one is a partial form of outsourcing while the other is more complete. This allows us to estimate how supplier switching interacts with organizational form.Credit unions ; Contracting out

Compatibility and Pricing with Indirect Network Effects: Evidence from ATMs

Incompatibility in markets with indirect network e¤ects can a¤ect prices if consumers value ?mix and match?combinations of complementary network components. In this paper, we exam- ine the e¤ects of incompatibility using data from a classic market with indirect network e¤ects: 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 e¤ects of incom- patibility are stronger in areas with high population density, suggesting that high travel costs increase both the strength of network e¤ects and the importance of incompatibility in ATM markets.atm, network effects

Limited and varying consumer attention: evidence from shocks to the salience of bank overdraft fees

The authors explore dynamics of limited attention in the $35 billion market for checking overdrafts, using survey content as shocks to the salience of overdraft fees. Conditional on selection into surveys, individuals who face overdraft-related questions are less likely to incur a fee in the survey month. Taking multiple overdraft surveys builds a "stock" of attention that reduces overdrafts for up to two years. The effects are significant among consumers with lower education and financial literacy. Consumers avoid overdrafts not by increasing balances but by making fewer debit transactions and cancelling automatic recurring withdrawals. The results raise new questions about consumer financial protection policy.Overdrafts ; Consumer behavior

Incompatibility, Product Attributes and Consumer Welfare: Evidence from ATMs

Incompatibility in market with network effects reduces consumers? ability to ?mix and match? components offered by different sellers, but can also spur changes in product attributes that might beneÞt consumers. In this paper, we estimate the effects of incompatibility on consumers in a classic hardware/software market: ATM cards and machines. We Þnd that while ATM fees ceteris paribus reduce the network beneÞt from other banks? ATMs, a surge in ATM deployment accompanies the shift to surcharging. This is valuable to consumers and often completely offsets the harm from higher fees. The results suggest that policy discussions of incompatibility must consider not only its direct effect on consumers, but also its effect on product attributes.ATMs, incompatibility, compatibility, discrete choice, network effects, demand estimation

Outsourcing, firm size, and product complexity: evidence from credit unions

Outsourcing business services is a key concern in the modern economy. Focusing on data processing services for credit unions from 1994 to 2003, the authors find that both credit union size and the diversity of their product offerings influence the propensity to outsource. The results suggest that simple scale-economy-based explanations for outsourcing may be inadequate.Contracting out ; Credit unions

Compatibility and Pricing with Indirect Network Effects: Evidence from ATMs

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.

Strategic Incompatibility in ATM Markets

We test whether firms use incompatibility strategically, using data from ATM markets. High ATM fees degrade the value of competitors' deposit accounts, and can in principle serve as a mechanism for siphoning depositors away from competitors or for creating deposit account differentiation. Our empirical framework can empirically distinguish surcharging motivated by this strategic concern from surcharging that simply maximizes ATM profit considered as a stand-alone operation. The results are consistent with such behavior by large banks, but not by small banks. For large banks, the effect of incompatibility seems to operate through higher deposit account fees rather than increased deposit account base.

Compatibility and pricing with indirect network effects: evidence from ATMs

Incompatibility in markets with indirect network effects can reduce consumers’ willingness to pay if they value “mix and match” combinations of complementary network components. For integrated firms selling complementary components, incompatibility should also strengthen the demand-side link between 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 and other banks’ ATM machines. We find that incompatibility led to lower willingness to pay for deposit accounts. We also find that incompatibility benefited firms with large ATM fleets.Automated tellers