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Comments on Knittel and Stango’s “Strategic Incompatibility in ATM Markets”

Comments on Knittel and Stango’s “Strategic Incompatibility in ATM Markets”. Jake Kendall UC Santa Cruz. The Guts. Model: One-shot profit maximization choosing surcharges Assume number of ATMs fixed Empirics Natural experiment in 1996 identifies demand curve for foreign ATM transactions

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Comments on Knittel and Stango’s “Strategic Incompatibility in ATM Markets”

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  1. Comments on Knittel and Stango’s “Strategic Incompatibility in ATM Markets” Jake Kendall UC Santa Cruz

  2. The Guts • Model: • One-shot profit maximization choosing surcharges • Assume number of ATMs fixed • Empirics • Natural experiment in 1996 identifies demand curve for foreign ATM transactions • Authors show surcharges are greater than monopoly level and increase with size of bank • Also show that prices of deposits increase with surcharges but market share does not Jake Kendall April 20, 2007

  3. Paper Highlights/Strengths: • Clear model • Natural experiment • Use actual variation in price rather than dummy for change in policy • Measure the strategic incompatibility premium and ATM usage response • Direct demonstration of theory • Very relevant to bank regulation policy Jake Kendall April 20, 2007

  4. The Debate • The central questions of the ATM surcharging literature: • Do ATM surcharges reflect strategic incompatibility motives? • Other Literature: Yes • Authors: Yes and measure the effect • Does strategic incompatibility contribute to profits via increased customer base or increased fees? • Hannan: Impact on customer base • Authors: Impact on fees, no impact on customer base • Do ATM surcharges increase or decrease welfare? • Ambiguous in the models by Bernhardt and Massoud • Other literature: Finds decrease • Authors: Not addressed directly in paper but measurement is relevant Jake Kendall April 20, 2007

  5. Important Assumptions • Nothing is systematically affecting non-customer demand and surcharges • Nothing is systematically affecting own-customer demand and surcharges Some Relevant Factors: • Riegle-Neal Interstate Banking and Branching Efficiency Act 1994 • Some states had local laws allowing surcharges before 1996 • Increase in ATM deployment Jake Kendall April 20, 2007

  6. Empirical Details • Full interaction of population quintiles • Simplest regression with no interactions • Can test for validity of instruments • Report constant (tells something about banks who didn’t surcharge) Jake Kendall April 20, 2007

  7. Possible extensions/further work • Discuss legislative changes in the retail bank sector at the time of the experiment • Extend model with choice of #ATMs, and possibly with micro foundation of consumer choice • Welfare analysis • Discuss geographic distribution of sample • Temperature, drive vs. walk, income, etc. • Dummy variable for each geographic market Nice paper! Jake Kendall April 20, 2007

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