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Working Paper No. 05-25
University of California, Department of Economics, Davis, CA
Incompatibility in markets with indirect network expects 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 expects 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.
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