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.
