Incompatibility, Product Attributes and Consumer Welfare: Evidence from ATMs
Incompatibility in markets with network effects can either benefit orharm consumers. Incompatibility reduces consumers' ability to "mixand match" components offered by different sellers, but can also beassociated with changes in product attributes that might benefitconsumers. In this paper, we estimate the effects of incompatibility ina classic hardware/software market: ATM cards and machines. Ourempirical model allows us to measure the indirect network effectrelating the value of ATM cards to ATM availability. It also allows usto measure the effects of incompatibility as measured by ATM fees. Oursample contains a relatively discrete move toward incompatibility after1996, when banks began to impose surcharges on non-customers using theirATM machines. We provide estimates of the partial equilibrium effects ofincreased incompatibility on consumer welfare, finding that ATM feesceteris paribus reduce the indirect network effect associated with otherbanks' ATMs. However, a surge in ATM deployment accompanies the shift tosurcharging and in many cases completely offsets the reduction inwelfare associated with higher fees. This suggests that welfare analysesshould consider the interaction between incompatibility and changes inproduct attributes.
Year of publication: |
2004
|
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Authors: | Knittel, Christopher R. ; Stango, Victor |
Institutions: | University of California, Davis ; Dartmouth College |
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