The Welfare Consequences of ATM Surcharges: Evidence from aStructuralEntry Model

We estimate a structural model of the market for automatic tellermachines (ATMs) in order to evaluate the implications of regulating ATMsurcharges on ATM entry and consumer and producer surplus. We estimatethe model using data on firm and consumer locations, and identify theparameters of the model by exploiting a source of localquasi-experimental variation, that the state of Iowa banned ATMsurcharges during our sample period while the state of Minnesota didnot. We develop new econometric methods that allow us to estimate theparameters of equilibrium models without computing equilibria. MonteCarlo evidence shows that the estimator performs well. We find that aban on ATM surcharges reduces ATM entry by about 12 percent, increasesconsumer welfare by about 10 percent and lowers producer profits byabout 10 percent. Total welfare remains about the same under regimesthat permit or prohibit ATM surcharges and is about 17 percent lowerthan the surplus maximizing level. This paper can help shed light on thetheoretically ambiguous implications of free entry on consumer andproducer welfare for differentiated products industries in general andATMs in particular.