Compatibility and Pricing with Indirect Network Effects: Evidence from ATMs

Abstract

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