Shared Ownership and Pricing in a Network Switch

Posted by Social Science Research Network

Shared Ownership and Pricing in a Network Switch James McAndrews (Federal Reserve Bank of New York) & Rafael Rob (University of Pennsylvania)

Abstract: We observe that many wholesale switches in automated teller machine (ATM) networks are jointly owned by their members and that this tends to occur more frequently when the wholesale industry is highly concentrated. We also observe that network switches are ‘natural monopolies’, their costs being largely fixed and their demand exhibiting substantial network externalities. Motivated by these observations, we model the competition for members between wholesale switches and the role joint ownership can play in attracting members. The model analyzes both the adoption decision (which network a bank chooses to join) and the subsequent pricing of switch and ATM services. We compare competition between two solely owned switches with competition between one solely owned and one jointly owned switch. Our analysis shows that a more concentrated structure results under the latter and that retail prices are higher. This calls into question the leniency of antitrust policy toward jointly owned structures.