Compatibility and pricing with indirect network effects

Compatibility and pricing with indirect network effects

by Christopher R. Knittel

Part of Working paper series ;

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"Incompatibility in markets with indirect network effects can reduce consumers ẃill- ingness 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 dur-ing 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"--Federal Reserve Bank of Chicago web site.

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