Incompatibility and Investment in ATM Networks

Incompatibility across rival systems can influence incentives to invest in product changes beneficial to the consumer. We investigate this phenomenon in the case of bank ATM networks, where the number of ATM locations is a measure of product quality and surcharge fees serve as an index of incompatibility. Using as a natural experiment the lifting of a surcharge ban in Iowa (and not in neighbouring states), we find that the associated increase in incompatibility for Iowa banks caused a substantial increase in the number of ATM locations offered to customers. This effect is larger (in percentage terms) for larger banks.