Incompatibility and Consumer Demand: Evidence from ATMs

Incompatibility between complementary components of system goods can have substantial effects on consumer welfare. In this paper, we estimate the effects of incompatibility in a classic “hardware/software” market: ATM cards and machines. Our empirical model allows us to measure the “indirect network effect” that a bank’s ATM deployment has on willingness to pay for competitors’ deposit accounts, and also the effects of incompatibility as measured by ATM fees. Our sample contains a relatively discrete move toward incompatibility after 1996, when banks began to impose surcharges on non-customers using their ATM machines. We provide estimates of the partial equilibrium effects of increased incompatibility on consumer welfare, finding that ATM fees ceteris paribus reduce the indirect network effect associated with other banks’ ATMs. We do find economically significant benefits of a surge in ATM deployment following the shift to surcharging. In urban markets in particular, these benefits often completely offset the reduction in welfare associated with incompatibility. ∗Knittel: Department of Economics, University of California, Davis, CA. Email: [email protected]. Stango: Emerging Payments Department, Federal Reserve Bank of Chicago, 230 S. LaSalle St., Chicago IL 60604. Email: [email protected]. Carrie Jankowski and Kaushik Murali provided excellent research assistance. We thank Andrew Bernard, Jeff Campbell, Ed Green, Tim Hannan and Catherine Wolfram for helpful comments. Seminar participants at Berkeley (Haas), Dartmouth (Tuck), the Federal Reserve Bank of Chicago and the 2004 AEA Meetings also provided constructive comments. The opinions herein do not reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.