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The Welfare Consequences of ATM Surcharges: Evidence from a Structural Entry Model

Author

Listed:
  • Gautam Gowrisankaran

    (John M. Olin School of Business, Washington University in St. Louis)

  • John Krainer

    (Federal Reserve Bank of San Francisco)

Abstract
We estimate a structural model of the market for automatic teller machines (ATMs) evaluate the implications of regulating ATM surcharges on ATM entry and consumer producer surplus. We estimate the model using data on firm and consumer locations, the parameters of the model by exploiting a source of local quasi–experimental variation, state of Iowa banned ATM surcharges during our sample period while the state of Minnesota not. We develop new econometric methods that allow us to estimate the parameters equilibrium models without computing equilibria. Monte Carlo evidence shows estimator performs well. We find that a ban on ATM surcharges reduces ATM entry percent, increases consumer welfare by about 10 percent and lowers producer profits percent. Total welfare remains about the same under regimes that permit or prohibit surcharges and is about 17 percent lower than the surplus maximizing level. This paper shed light on the theoretically ambiguous implications of free entry on consumer welfare for differentiated products industries in general and ATMs in particular.

Suggested Citation

  • Gautam Gowrisankaran & John Krainer, 2004. "The Welfare Consequences of ATM Surcharges: Evidence from a Structural Entry Model," Working Papers 04-16, NET Institute, revised Nov 2004.
    • Handle: RePEc:net:wpaper:0416
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    References listed on IDEAS

    as
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    Cited by:

    1. Paul B. Ellickson & Sanjog Misra, 2008. "Supermarket Pricing Strategies," Marketing Science, INFORMS, vol. 27(5), pages 811-828, 09-10.
    2. Stijn Ferrari & Frank Verboven & Hans Degryse, 2010. "Investment and Usage of New Technologies: Evidence from a Shared ATM Network," American Economic Review, American Economic Association, vol. 100(3), pages 1046-1079, June.
    3. Hannan Timothy H. & Borzekowski Ron, 2007. "Incompatibility and Investment in ATM Networks," Review of Network Economics, De Gruyter, vol. 6(1), pages 1-15, March.
    4. Fumiko Hayashi & Zhu Wang, 2008. "Product innovation and network survival in the U.S. ATM and debit card network industry," Research Working Paper RWP 08-14, Federal Reserve Bank of Kansas City.
    5. Christopher R. Knittel & Victor Stango, 2009. "How Does Incompatibility Affect Prices?: Evidence From Atm'S," Journal of Industrial Economics, Wiley Blackwell, vol. 57(3), pages 557-582, September.
    6. Hannan, Timothy H., 2007. "ATM surcharge bans and bank market structure: The case of Iowa and its neighbors," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1061-1082, April.
    7. Zhu Wang & Fumiko Hayashi, 2011. "Product Innovation and Network Survival in the U.S. ATM and Debit Card Industry," 2011 Meeting Papers 725, Society for Economic Dynamics.
    8. Reynold Byers & Shuya Yin & Xiaona Zheng, 2012. "Atm Pricing And Location Games In The Retail Banking Industry," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 29(01), pages 1-29.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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