Beneficio Atms IIOC2012-225

The Benefits of ATM (Automatic Teller Machines) Fees
in the Retail Banks’ ATM Industry: Competition and Welfare*
This version: Feb. 2012
Abstract
This paper uses a constructed banking ATM data over the sample period of 2008-2009 with consumers’
demographics to cash-withdrawal preference to explore the ATM network effect and consumer welfare
under interconnection pricing scheme. Following the discrete choice literature, I explore the impact of
ATM surcharge fees and its foreign fee. ATM surcharge fee increases to the network effects when a
customer has a high frequency to withdraw cash from an ATM. This is because the expected distance
from growing banks’ ATM deployment is lessening and average consumers to ATM use then have a high
preference to large banks with large ATM networks. The marginal disutility to small banks with relatively
small ATM networks is particularly increasing on a reward to debit card usage. Foreign fee indirectly
captures the trade-offs between consumer’s cost to unaffiliated ATM use and their convenience has a
positive effect to utility and a large number of competitors in markets give consumer benefits because of
increasing convenience to ATM use. The results appear to be welfare gains for consumer in that
competition among banks involves an incentive for large banks to deploy ATM terminals more by
imposing ATM fees of surcharge and foreign fee.
Keywords: Discrete choice, ATM fees; surcharge, foreign fee, Demand elasticity, Retail banking ATM,
Competition, Consumer welfare
*
I am responsible for any remaining errors and omissions
Department of Economics, 2115 G Street, Monroe 324, Email: kjeon@gwmail.gwu.edu
THE BENEFITS OF ATM FEES: COMPETITION AND WELFARE BY KIYONG JEON
1. Introduction
The development of banking ATMs (Automatic Teller Machines) industry has received much attention in
recent years, mainly due to growing ATM networks. Recent scholarship has studied whether its growth
has maximized consumer welfare. The concern is rooted in the network effects that depend on total
number of users or customers patronizing banking ATMs. Because the form of banking ATMs of both
banking cards for depositors and differentiated banking ATMs can be regarded as network effects.
The deposit-holding consumers of one bank may potentially use their ATM cards at ATMs of
competitors’ institutions. ATM cards and ATMs form a system of complementary components which
produce account transactions. There are two types of fees when a card-holder of one bank conducts a
transaction using an ATM owned by another, one of which is a surcharge levied by the banks owned the
ATM, the other of which is a foreign fee levied by the card-holder’s own bank. This involves the partial
incompatibility in that the foreign ATMs’ use for account-holder is imposing ATM fees from transaction
despite the compatible technologies (Knittel and Stango, 2008).1
Partially incompatibility softens a price competition and magnifies incumbency advantages for
larger banks. The larger banks may thus prefer their ATMs to be incompatible with competitors to
enforce ATM use for customers. They might refuse to make it compatible because operating and
deploying costs for a large number of ATMs is much higher than small banks with relatively small ATM
networks, and in turn they would like to set an ATM fee on its own way. Therefore they might have a
greater strategic pricing effect. They charge it more for ATM use by foreign customers or non-members,
assuming that they do not charge it own customers so as to increase its bank account base. For example,
there are two banks, one of which holds more branches and ATMs than the others. Consumers are more
likely to prefer a larger and geographically closer bank because a higher ATM fee to the larger banks
makes foreign customer to move their account base (Knittel and Stango, 2008, 2009).
This paper aims to shed light on both the consumers’ decision in ATM use and the strategic effect
for banks to ATM deployments. I consider the case of Metropolitan Statistical Areas (MSAs) which is
represented urban area with the largest competitive market in U.S.. The recent regulation prevents the
banks from surcharging for cash-withdrawal at banking ATMs. This environment provides an interesting
study to partially incompatible ATM networks and strategic behavior of banks (Prager, 2001, Ishii, 2005,
and Knittel and Stango, 2008, 2009). Similarly, I derive to ATM revenue and strategic behavior for banks
and ask the following two related questions: (1) whether partially incompatibility of ATM fees increases
the network effect in the issue of whether customer will prefer larger banks with larger ATM networks, (2)
1
The compatibility may benefit consumers if greater compatibility causes individuals to enhance their ATM use in holding ATM
fee constant
1
how consumer welfare affected in the interconnection pricing behavior determined by competition, which
is derived by the distance between banking ATMs and consumers.
I consider equilibrium consequences regarding interconnection pricing by surcharge and foreign
fee when competition occurs in ATM deployments. This is a consistent issue with the recent proliferation
of ATMs.2 The empirical literature on ATM pricing and provision is related to the trade-off between
incompatibility created by surcharge and increasing consumer welfare (Knittel and Stango, 2008, 2009).
The partially incompatibility may generally reduce the welfare, but the increased size of available ATMs
resulting from surcharging completely compensates welfare reduction of consumers. Knittel and Stango
(2008) develop a structural model to estimate the parameter of a nested logit demand system for deposit
accounts and ATM services to explore the effects of incompatibility on consumer welfare. The surcharge
increase implies a redistribution of part of the demand for own banks to the other institutions in
proportions equal to their original market shares.
An equilibrium pricing of ATM use for consumers is regarded as the network effects in this
industry. This is consistent with Ishii’s (2005) finding that network effect for ATM arises by its surcharge
fee. She uses a unique bank specific data-set provided by Massachusetts’ Metropolitan Area, and then
estimates a structural model of demand and supply for banking services to find a significant effect of
surcharge. Surcharging has a substantial impact on market share of demand deposit service and consumer
welfare, because provision of ATMs related to social optimum is a strategic consideration for banks.
I develop an empirical model of cash withdrawal both demand for consumers with holding
deposit accounts and banking ATM profits driven by surcharge and foreign fee for customers in the MSA
markets. The demand of consumers for cash withdrawals depends on branches and ATMs’ availability of
banks. ATM surcharge cost is related to network effect in that the constructed banking ATM data interact
with consumer demographics with cash-withdrawal preference while its foreign fee would capture to the
trade-offs between own customer’s costs and convenience to foreign ATM use. Therefore the results will
be answer for what is the optimal size of ATM networks related to distances in that the increased banking
ATM networks have incentive to competition. The model also utilizes a structural discrete choice model
to estimate the changes in consume welfare due to ATM fees. It makes necessary the use of instruments
to correct for the endogenous pricing due to inclusion of unobserved banking ATM characteristics. The
model is not only allowing for unobserved banking ATM characteristics but also importantly allowing for
consumer heterogeneity to product characteristics (Berry, Levinsohn, and Pakes, 1995). In addition, the
unobserved consumer heterogeneity in the valuation of different banks’ characteristics improves the
2
Hayashi et al. (2006), in the early stages of ATM deployment, ATM machines were generally owned and operated by banks,
with the machines physically located on the bank premises. By the 1990s, much of the growth in ATM deployment shifted to
nonbank locations such as grocery stores. There were 415,321 ATMs deployed in the U.S as 2007, and all of these ATMs were
connected to at least on regional shared ATM network.
2
model’s predictability when we use consumer demographics related to the average demographics to
product choice (Petrin, 2002).
This paper contributes to the interest questions to the growing the retail ATM fees such as
surcharge fee and foreign fee on banking ATM industry. I collect a data set covering the entire network
across U.S. MSA (Metropolitan Statistical Area) market over the sample period of 2008-2009. I show
how to consistently estimate demand and supply parameters while allowing for consumer demographics
to interact with banking ATM characteristics. The banking ATM demand and supply accounts into model
simultaneously and it depends on unobserved banking ATM and consumer characteristics. A
methodological perspective in optimal ATM choice of supply model closely relates to the empirical entry
literature which introduced models of free entry (Bresnahan and Reiss, 1990, 1991). This model also
accounts the issue of endogeneity in measuring optimal ATM choice because banks tend to deploy their
ATM in market where a higher population- and income-density have. Another issue to explore the trade-
offs between foreign ATM use and convenience is measured by variable on foreign fee, the results imply
that the positive trade-offs occur only in model without consumer demographics but do not involve it in
consumer tastes with cash-withdrawal preference.
The firm has a strategy to ATM locations that the larger ATM networks give the competitors’
customer incentives. From the results of bank’s expected distance between their ATMs, consumer prefers
the larger banking ATM networks and the increased competitors’ ATMs give consumer benefits on
choosing ATMs over a cash-withdrawal service. The important message from the estimated results in
consumer welfare from sample period of 2008-2009 is that consumers have experienced welfare gains
mainly due to decreasing average distance among ATM terminals. My results suggest that the increasing
ATM deployment induced by ATM fees is also generating welfare gains for consumers, nevertheless the
retail ATM fees has led to an increased cost for foreign-ATM transactions.
This chapter is organized as follows. In the next section, I review the relevant literature. Section 3
is an overview of the banking ATM industry. Section 4 presents the empirical methodology in estimating
demand and supply model. The paper focuses on the random coefficients multinomial logit model and the
inclusion of consumer demographics of micro data on the distribution of consumer’s cash-withdrawal
preferences. In section 5, I describe basic statistics in the sample period of 2008-2009. Section 6
illustrates the estimation procedures to random coefficient logit model. Section 7 describes the results.
The paper is concluded in section 8.
3
2. Literature Review
In this section I address the literature on market-entry models to develop and to analyze the bank’s ATM
industry. This study builds on the entry literature begun by Bresnahan and Reiss (1991) and Berry (1992).
Firms enter the market if the level of population and income for consumers required to support a given
number of banks in a market grow with the number of firms then competition must be getting tougher.
The tougher competition shrinks profits margin and therefore requires a large population and a positive
growth of income level to generate profits necessary to cover the entry costs. With oligopoly market
structure, Cohen and Mazzeo (2007) analyze bank behaviors modifying profits functions by Bresnahan
and Reiss (1991). They analyze the competition among different types of banks such as multi-market
banks, single market banks, and thrifts. They explore one type of banks affects the profits other type
banks. The result suggests that differentiation between bank types is an important source to competition
and they find multi-market banks and single-market banks affect each other rather than thrifts do.
Recent work has combined entry models with a network externality, the impact of network
effects, and incompatibility and compatibility in hardware and software industry particularly using ATMs
and ATM cards (Knittel and Stango, 2008). They address the implications of bank surcharges and policies
using data on the size of ATM networks and its costs by the largest 300 banks over the 1994-1999. They
explore a structural demand model that yields the surcharging effect and ATM availability on utility.
Given the relationship between surcharging and the size of ATMs networks, banks then decide locations
to deploy their ATMs. They find that the increased available ATM-terminals relatives to network effect
imposing ATM surcharge fee have more benefits to consumer in spite of higher ATM fees because the
market with higher population densities is likely to produce higher travel costs to consumer. Hence ATM
availability on market is of great value to consumer with deposit-account. Their finding also suggests that
the opposite may be true in markets with low population densities.
Another paper, Knittel and Stango (2009), finds that incompatibility as measured by surcharges
leads to lower willingness to pay for deposit account, and incompatibility benefits the larger banks related
to increase in the number of ATMs. They explore the impact of banning ATM network no-surcharge rules
in 1996. They then explore the changing consumer surplus using a difference-in-difference (DID)
approach where change observed from a period before to a period after 1996 for banks in States. They
find that consumers have been experienced in welfare increasing in the largest markets where have higher
population densities while consumer surplus falls in the markets where has a smaller one by
incompatibility.
There are some empirical studies on ATM competition. Hannan et al. (2003) examine the
probability of surcharging using a probit model and find that ATM surcharge fee is more likely to
4
increase market share of banks but that is not related to the size, for example, large banks. Prager (2001)
explores whether ATM surcharging has a negative effect to small banks when only some states allowed
ATM surcharge fee while others did not. She examines the market share of small banks in State level data
between 1987 and 1995. She finds that the market share of small banks, based on assets rather than
deposits, is not substantially different between surcharging allowed States and non-surcharging States.
Gowrisankaran and Krainer (2003) also examine the effects of surcharging using a structural entry model.
However they assume that each entrant owns a single ATM and do not consider the overall effect of ATM
service with banking deposit services.
McAndrews (2001) examines how banks theoretically determine an equilibrium choice of foreign
fees and surcharges in spatial environments. Because customers do not exactly know banking ATM
locations they are assumed to have random itineraries around a circular city and to experience random
needs for cash. The results are consistent with Massoud and Bernhardt (2005) in that the market share of
bank, travel costs to consumers, and the distance between ATM terminals is increased by ATM surcharge
fee. In a symmetric model, an increase in the number of banks operating those ATMs will lead to an
increase in equilibrium surcharge under the assumption that total number of ATMs is constant. This is
because the expected minimum distances for customers, who need to travel to use their own banking
ATM, increase.
Ishii (2005) addresses ATM’s network effect as a key factor to deploy the ATMs using cross-
section data provided by Massachusetts Division of banks for 2002. She uses a two-period model with
simultaneous move in each period: in the first period, each bank chooses a number of ATMs to maximize
its profits given its awareness on the number of ATMs likely to be chosen by its competitors. In the
second period, banks set interest rates for deposit conditional on the ATM networks in existence and
consumer choice of banks. She presents a structural model of consumer and bank behavior that allow
firms to choose ATM networks based on its deposit rates. Demand for a bank’s deposit services thus
depend on its ATM network size corresponding to its surcharge. She suggests that each bank’s ATM
cards are technologically compatible with all ATMs in shared network but the ATM use with surcharge
leads to partial incompatibility. She estimates a structural model with bank specific of banking account
services associated with an interest rate, and finds the equilibrium prices for surcharge implied
incompatibility have significantly positive network effects on bank’s incentives to invest in ATM
networks. However consumer heterogeneity over ATM preference is only covered by error terms in the
utility function. Hence she uses the simplified logit model in that consumers have a homogenous deposit-
level. It leads that her results do not capture a trade-off between the convenience and the price when
consumer make a decision to ATM use.
5
Although our model and those of Ishii share common features, the outcomes of the distribution of
consumers’ underlying choice for ATMs are very different. In Ishii’s paper, she uses quadratic utility
function to measure consumer choosing bank’s branch and to account local geography for customers.
Because she assume that consumer’s preference is changed by determining customer’s distance for ATM
use, which are to travel to reach a bank. However the consequences of the distribution of consumer’s
choice for ATM use depend on the consumer demographics with cash-withdrawal preference such that it
reflects flexibility to cash-withdrawal demand allowing consumer heterogeneity. Therefore consumer is
potentially sensitive to charge fees for ATM use. The key things are values among number of ATMs and
price term represented by the surcharge and the foreign fee in our model. Moreover consumer can predict
their benefits related with between a travel cost according to the number of ATMs and the prices for ATM
use. The utility function for consumer is changed by variability not only in the number of banking ATMs
but also in pricing for surcharge and foreign fee.
Croft and Spencer (2003) theoretically consider a model with interchange fees, foreign fees and
surcharges. They analyze whether to surcharge when two banks have exogenous equal the sizes of ATM
networks. They find that, when surcharging is not allowed, foreign fees serve to maximize the profits, and
the interchange fee is set at the marginal cost of an ATM transaction. But an interconnection pricing
schemes lead to different behaviors for banks and the interchange fee is then not equal to the marginal
costs. The reasons are as follows: first, the customer prefers their own bank’s ATM if ATMs are located
at the same distance. Second, card-holders prefer banks with large ATM networks to avoid their costs and
surcharging affects consumer’s choice of where to establish accounts. Third, ATM surcharge fee
encourages the ATM’s proliferation: it may increase welfare in the case of competition between banks.
3. Banking ATM Industry Overview
The ATM industry infrastructure consists of card issuing banks, ATM machines, and a
telecommunications network to process transactions. Figure 1 illustrates definitions for both one network
and multiple networks. The case where an ATM and a customer’s bank both use multiple networks in
Figure 1, the interchange fee is determined by an access charge in telecommunications that will vary
based on the different networks. The interchange fee generates between the bank and the ATM owner,
and switch fee that create between the bank and the ATM’s network, but these fees are not paid by the
customer. Because the interchange fee produces compensation in association with surcharge to ATM
owner for non-customer transactions, and the switch fee also produces compensation to the customer’s
bank for routing non-customer transactions.
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Figure 1. ATM Industry: Specified Interchange Fee, Surcharge, and Foreign Fee
One Network Multiple Networks

Pay Switch Fee
ATM Owner Bank A (issuers) Network
Interchange fee Pay interchange Fee

ATM Owner
Issuer
Bank A’s customer uses Bank B’s ATM
Customer fee
Customer Bank B’s ATM
Source: Rochet, Jean-Charles and Tirole, Jean (2002), “Cooperation among Competitors: The Economics of Payment Card
Association”
However, consumers pay a foreign fee and surcharge using their non-holding bank’s ATMs.
Bank A, for example, may also charge its cardholding customer a foreign fee for using Institution B’s
machine. Bank B may charge the customer a surcharge for using its ATM machine. Thus a transaction in
which a customer from Bank A uses an ATM owned by Institution B generates a number of fees. Bank A
must pay switch fee of the network for routing the transaction. These fees range from 4 to 8 cents per
transaction. The card issuing banks, Bank A, must pay an interchange fee to ATM owner. These fees
range from 25 to 50 cents for a withdrawal and it is determined by the ATM network. 3
Table 1. Average Herfindahl-Hirschman index (HHI) for Banks and ATMs
year 2001 2002 2003 2004 2005 2006 2007 2008 2009
*
Average of banking HHI 1516 1520 1517 1530 1550 1525 1507 1518 1540
**
Average of ATM’s HHI - - - - - - - 692.1 647.0
Source: Federal deposit Insurance Cooperation’s Summary of Deposits. NYCE to employ data of the number of ATMs
Notes: *The data is employed by FDIC’s Call Reports (value: 10,000)
**
Constructed banking ATM data set collected by 2008 and 2009 using commercial bank’s ATMs (value: 10,000)
In Table 1, the average Herfindahl-Hirschman index (HHI) computed from deposit market shares
in 2009 was around 1540 in MSA markets, a slight increase since 2007. According to this measure,
average of ATM’s HHI computed by the number of ATMs for each banks have decreased in 6.5 percent
of the markets at the sample period employed here covers the years 2008-2009. Furthermore bank
characteristics have also changed. Banks have more branches and ATMs per local markets, and their
geographic expansion has increased as banks operate in more States. Also, the average of bank size
3
EFT Network Data Book 2003 and 2006 Editions.
7
defined by domestic deposits has risen as well as banking deposit service fee and ATM fees, e.g.
surcharge and foreign fee, is slightly increased.
The banking ATM markets are defined as geographically local urban areas, e.g. 320 MSAs, in the
U.S.. From the constructed banking ATM data, each MSA market had 84.7 banking branches in 2008,
101.4 banking branches in 2009, which implies to increase in the number of ATMs for most market
employed sample period. Table 2a and Table 2b show a top 20-bank over total deposits during 2008-
2009 and recent total number of banking ATMs over 2007-2009, respectively. Banks open branches in
response to their own market targets. Banks also open branches and ATMs in hope of shifting demand
and thus attracting new customers. A recent FDIC study on bank branch growth finds that this growth
follows population and employment growth in shifting a bank’s own demand (Spieker, 2004).
Table 2b show a changing total number of banking ATMs in 2007-2009. The increased average
percentage level for ATM deployments of top 14 banks is largely positive, for example, the number of
ATMs for U.S. top 5 banks has grown significantly, though the number of transactions per ATM and the
revenue per ATM has been declining on measuring ATM performance.4 This is evidence that surcharge
levels have continued to rise even by declining in average transactions per ATM.
Table 2a.Top 20 Banks over Total Deposits in 2008 and 2009
Year 2008 2009

Rank Name Total Name Total
Depositsa Depositsb
1 BANK OF AMERICA 640 BANK OF AMERICA 820
2 JPMORGAN CHASE BANK 460 JPMORGAN CHASE BANK 620
3 WACHOVIA BANK 400 WELLS FARGO BANK 330
4 WELLS FARGO BANK 280 CITIBANK 260
5 CITIBANK 220 U S BANK 150
6 U S BANK 130 SUNTRUST BANK 120
7 SUNTRUST BANK 110 BRANCH BANKING&TRUST CO 94
8 REGIONS BANK 86 REGIONS BANK 94
9 BRANCH BANKING&TRUST CO 86 PNC BANK 84
10 HSBC BANK USA 83 HSBC BANK USA 84
11 PNC BANK 77 TD BANK 79
12 TD BANK 73 CAPITAL ONE 73
13 CAPITAL ONE 71 KEYBANK 67
14 KEYBANK 61 UNION BANK 56
15 COMERICA BANK 41 COMERICA BANK 40
16 UNION BANK OF CALIFORNIA 41 HUNTINGTON NATIONAL BANK 39
17 HUNTINGTON NATIONAL BANK 37 BANK OF THE WEST 34
18 BANK OF THE WEST 35 M&I MARSHALL&ILSLEY BANK 33
19 FIFTH THIRD BANK 33 FIFTH THIRD BANK 32
20 M&I MARSHALL&ILSLEY BANK 32 HARRIS 27
Total Number of Banks 320 Total Number of Banks 326
Source: FDIC’s Summary of Deposits(SOD) for 2008 and 2009
Notes : Wachovia Bank is a division of Wells Fargo at Dec. 31, 2008
a
June 2008 ($1billion)
b
June 2009 ($1billion)
4
2006 ATM Deployer Study provided by DOV consulting.
8
Table 2b. Total Number of Banking ATMs Deployed in 2007 and 2008 & 2009
2007 2008 2009

Rank Name ATMsa %a Name ATMsb %a Name ATMsb %b
1 BANK OF 18,753 14.4 BANK OF 9516 16.65 BANK OF 11098 16.83

AMERICA CORP. AMERICA NA AMERICA NA
2 JPMORGAN 9,330 7.10 WACHOVIA BANK 5810 10.16 JPMORGAN 9576 14.52
CHASE & CO. NATIONAL ASSN CHASE BANK NA
3 BARCLAYS 7,053 5.40 JPMORGAN 5606 9.81 WELLS FARGO 5682 8.61
GROUP CHASE BANK NA BANK NA
4 WELLS FARGO 6,900 5.30 WELLS FARGO 5258 9.20 U S BANK 4208 6.38
& CO. BANK NA NATIONAL ASSN
5 WACHOVIA 5,138 3.90 U S BANK 3428 5.99 SUNTRUST BANK 3140 4.76
CORP. NATIONAL ASSN
6 U.S. BANCORP 4,867 3.70 SUNTRUST BANK 3096 5.41 REGIONS BANK 2776 4.21
7 WASHINGTON 4,713 3.60 REGIONS BANK 2416 4.22 BRANCH 2256 3.42
MUTUAL INC. BANKING
&TRUST CO
8 POPULAR INC. 4,600 3.50 BRANCH BANKING 1922 3.36 CITIBANK 1904 2.88
&TRUST CO NATIONAL ASSN
9 ROYAL BANK OF 4,547 3.50 CITIBANK 1810 3.16 PNC BANK 1898 2.87
CANADA (RBC) NATIONAL ASSN NATIONAL ASSN
10 RBC BANCORP 4,419 3.40 TD BANK 1690 2.95 TD BANK 1782 2.70
ORATION (USA) NATIONAL ASSN NATIONAL ASSN
11 PNC FINANCIAL 3,900 3.00 PNC BANK 1640 2.87 KEYBANK 1360 2.06
SERVICES GROUP NATIONAL ASSN NATIONAL ASSN
INC.
12 CITIGROUP INC. 3,500 2.70 KEYBANK 1340 2.34 HUNTINGTON 892 1.35
NATIONAL ASSN NATIONAL BANK
13 SCOTIABANK 2,852 2.20 HUNTINGTON 902 1.57 HSBC BANK USA 756 1.14
NATIONAL BANK NATIONAL ASSN
14 CITIZENS 2,781 2.10 HSBC BANK USA 760 1.37 BANK OF 734 1.11
FINANCIAL GROUP NATIONAL ASSN THE WEST
Total Banking 127,867 57,140b 65,930b

ATM terminals
Total ATM terminals 415,321 204,297b 247,133b
(Off-and On-permise)
Notes : ATMs in second row indicates total number of ATMs
% in second row represents the percentage growth of the number of ATMs
a
Payments Source and Source Media, Inc.,http://www.paymentssource.com/
b
Constructed banking ATM data for this paper,from NYCE (http://www.nyce.net/atm/locator.jsp), Summary of Deposits, and
Bankrate.com (http://www.bankrate.com )
ATM fees consist of two parts: wholesale fees and retail fees. The pre-transaction wholesale
ATM fees, e.g. switch fees and interchange fee have shown little change since 2002, suggesting the
industry has reached a wholesale pricing equilibrium (Hayashi et al., 2006). Such both wholesale ATM
fees have tiered pricing based on transaction volume. Interchange fees vary, although the variation is not
based on volume. Interchange fees are sometimes determined by whether a transaction is at on- or off-
premise ATM. Nonbank off-premise ATM have lower interchange fees on the Plus network and receive
higher interchange fees on the Co-op, NYCE, Star and possibly other networks, compared with other
ATM owners (Hayashi et al., 2006).
The retail ATM fees, e.g. surcharge and foreign fee, have different pricing scheme. In Table 3a,
ATMs impose a surcharge on foreign acquired transactions, banks’ and non-banks’ surcharging to non-
customers continue to increase. The average surcharge rate at on-premise (or off-premise) ATMs has
increased by 20% (or 23%) from 2001 to 2006, that is $1.45 (or $1.48) at 2001 and $1.74 (or $1.79) at
9
2006. But the general annual survey of bank fees was discontinued after 2006. Instead, Table 3a and 3b
list recent the level of ATM surcharges and foreign fees from the constructed banking ATM data. I collect
the data sets for foreign fees and surcharges from Bankrate.com for June-Aug. 2008 and June-Aug. 2009.
It suggests that average rate of surcharges and foreign fees are higher in 2009 than in 2008.
Table 3a.Retail ATM Fee (Surcharge and Foreign Fee), 2001-2006, and 2008-2009
Fee ATM location Data Source 2001* 2002* 2003* 2004* 2005* 2006* 2007* 2008** 2009**
Surcharge All Federal Reserve 1.32 1.32 - - - - - - -
Bankrate.com 1.36 1.40 1.38 1.32 1.40 1.60 - 2.32** 2.43**
Dove
On-Premise 1.45 - 1.57 - - 1.74 - - -
Consulting
Dove
Off-Premise 1.48 - 1.65 - - 1.79 - - -
Consulting
Foreign All Federal Reserve1.17 1.14 - - - - - - -
Fee Bankrate.com 1.20 1.22 1.31 1.28 1.37 1.29 - 1.75** 1.78**
Notes: * by a Guide to the ATM and Debit Card Industry, 2006 Updata, pp. 7 (Hayashi et al., 2006)
**
Constructed banking ATM data for this paper, data comes from Bankrate.com for 2008 and 2009
Table 3b.The Average Value of Surcharge and Foreign Fee between 2008 and 2009
2008 2009
Average Average Average Average Average Average
Bank’s Size (by Assets)
Surcharge Foreign Fee Number of Surcharge Foreign Fee Number of
($) ($) ATMs* ($) ($) ATMs*
Large Banks:
Asset over 10Billion ($) 2.38 1.80 120.43 2.50 1.85 139.20
Average 2.38 1.80 120.43 2.50 1.85 139.20
Medium Banks:
Assets 3 Billion To 10 Billion ($) 1.95 1.34 28.18 2.08 1.72 31.02
Assets 1billion To 3billion ($) 1.87 1.41 23.27 2.09 1.27 18.78
Assets 500 Million To 1billion ($) 1.47 1.13 11.12 1.93 1.36 10.44
Average 1.76 1.29 20.85 2.03 1.45 20.08
Small banks:
Assets 300 Million To 500 Million ($) 2.33 1.11 10.79 2.14 1.24 8.64
Assets 100million To 300million ($) 2.06 0.56 10.08 1.81 0.76 8.50
Assets 50million To 100million ($) 1.25 0.00 3.00 1.35 1.00 11.70
Assets Under 50 Million ($) 1.50 0.00 3.50 2.75 0.50 2.00
Average 1.78 0.41 6.84 2.01 0.87 7.71
Total number of observations 30182 37574
Total number of banks 320 326
Total number of MSAs 354 359
Note: * The average number of banking ATMs per each MSA (Metropolitan Statistical Area)
Typically, the best strategy for the largest banks with extensive ATMs’ network may be to
establish a high surcharge, and evidence suggests a positive relation between surcharges and size of banks
(2006 ATM Deployer Study, 2006), that is shown by Table 3b. Large financial institutions may give up
some foreign transactions as a result but are willing to do so because surcharging provides incentives for
10
consumers to become customers of the bank and such customers take advantage of the bank’s many
ATMs.
In the early stages of ATM deployment, the ATM was generally located on the bank premises
and it was operated by banks. A rapid expansion of ATM deployment in recent years shifted to off-
premise ATM terminals, such as airports, grocery stores, gas stations, and convenience stores. Table 3c
shows average monthly revenue and expenses for on-premise and off-premise ATM. ATM earns an
average of $1,104 per month at their on-premise ATMs, and $1,013 per month at their off-premise
ATMs.5 This table also shows the cost of managing an ATM network per ATM is higher than total
revenue. Banking ATMs will consider the trade-offs between reducing expenses and maximizing
consumer access, because ATM expenses varies based on the banks’ types. The average number of
monthly transaction per ATM also varies significantly depending on the types of ATM and the location of
ATM placed. Table 3d represents the average monthly transaction for on-premise and off-premise ATMs.
Average transaction of on-premise ATMs has monthly 3,651 transactions per ATM and off-premise
ATMs has 1,807 transactions per ATM.
Table 3c. Average Monthly Revenue and Expenses for On-and Off-Premise ATMs
On-Premise ATMs ($) Off-Premise ATMs ($)
Surcharge 706 709
Interchange 398 304
Total Revenue 1104 1013
Expenses * 1,444 1,450
Source: 2006 ATM Deployer Study, The Stratification of the ATM Industry by Dove Consulting,
(A Divison of Hitachi Consulting)
Note:* Expenses include in Depreciation, Cash Replenishment, first and second line maintenance, telecommunications,
terminal driving, back office operations, cost of funds, corporate overhead and rent
Table 3d. Average Monthly Transactions for On-and Off-Premise ATMs

On-Premise ATMs Off-Premise ATMs
Average Transaction per ATM 3651 1807
Average Foreign ATMs’ Transaction (%) 20% 49%
Average Foreign Transaction per ATM 730 885
Source: 2006 ATM Deployer Study, The Stratification of the ATM Industry by Dove Consulting,
(A Divison of Hitachi Consulting)
5
On-premise ATM earns revenues 64% from surcharge and 36% from interchange fee, while off-premise ATM earns profits 70%
from surcharge income and 30% from interchange fee (ATM Deployer Study, 2006 by Dove Consulting)
11
4. Model
In this section, I consider the empirical application for measuring the effects of competition. I set out the
model of banking ATM cash-withdrawal service and consumer behavior, assuming that consumers
maximize their utility given products characteristics. Note that banking ATMs is homogenous product
with respect to cash-withdrawal service.6
4.1. Consumer Behavior

The model assumes that individual consumers are endowed with a level of deposits, and that each
consumer places his/her deposits in the bank of choice. But individual deposits are not observed. Instead,
simple assumption will be used to related deposits to consumer unobservable to develop discrete choice
models with multiple unobserved choice characteristics. Thus there is an unobserved heterogeneity at the
individual level. Existence for such heterogeneity substitutes in unobserved choice characteristics because
unobserved choice characteristics create substitution patterns (Berry, Levinsohn, and Pakes, 1995, Nevo,
2000, 2001). I consider model with a large number of individuals and a number of banks (choice) given
by data from multiple markets, which a constructed banking ATM data contains in 320-MSA
(Metropolitan Statistical Area) County. Such markets distinguished by geography and have different
populations and average or median incomes, and have different distributions of individual characteristics.
Assuming unobserved bank characteristics may differ from between MSA markets, bank characteristics
vary by market included in available ATMs based on the population and consumers’ income. Hence I will
estimate the substitution pattern from constructed banking data-sets on how choices vary as the
distribution of consumer/product characteristics.
4.1.1. Demand Equations

The empirical model of consumer behavior is consisted of two ways: first, I use a discrete choice model
for banking ATMs’ demand and in turn pricing behavior estimates the substitution patterns between
banks when model, with parameterized a flexible approximation in a finite sample for a simple logit
model, use (McFadden, 1974). Second, I follow the method to generalizing demand allowing for realistic
substitution pattern (Berry, Levinsohn, and Pakes, 2004). Because it not only allows for unobserved bank
characteristics, but also importantly allows for consumer heterogeneity to product characteristics. It is
important contributions for model of Berry, Levinsohn, and Pakes (1995)7, because it shows how to do
the inversion in a random-coefficient logit model in allowing endogeneity problem. Main goal is thus to
6
Traditionally, the empirical frameworks for measuring the effects of competition assume that consumers maximize their utility
given products characteristics in a homogeneous-good industry (Bresnahan and Reiss, 1991)
7
Henceforth, BLP
12
identify the flexible substitution pattern as controlling for endogenous price of banking ATM cash-
withdrawal service.
4.1.2. Logit Model on Banking ATM Demand

I begin by defining random utility of individual household demand, and then aggregate over consumers to
capture a consistent aggregate demand for banking ATMs’ service. In the application, consumers or
individual * + maximize their indirect utility by customer patronizing banks’ or ATMs’ cash-
withdrawal service from a bank * + in specific market, , at time . The
conditional indirect utility function of consumer from choosing bank ’s cash withdrawal service at time
is,
∑ , (4.1)
where is a vector of price by bank j, e.g. individual surcharge cost or deposit service fee, is
vectors of k bank’s and banking ATM’s characteristics, is an unobservable error term which is
unmeasured aspects of banks and banking ATMs quality, and is a random error assumed to be
independent and identically distributed (IID) type I extreme value distribution. A vector accounts
for the consumer’s travel distance to reach a banking ATM or branch. I follow a square root law for a
vector, , so that it measure the expected distance to the nearest ATMs between the consumers’ and
ATMs’ location, which is given by,
√ , (4.2)
where N is the number of shared ATMs of bank j and M is the market surface (Kolesar and Blum, 1973).
K is a constant of proportionality which is the number of banks with holding shared ATM networks,
operated by market m. Each consumer i then choose firm j when bank j gives the highest utility and it can
be defined as,
2 . / ( ) 3 (4.3)
where captures consumer specific terms that are not observed by the econometrician. The choice
indicates the outside options, that is given by,
13
, all , (4.4)
where is normalized to zero.8 The choice probabilities for consumer i, if the has the type I
extreme value distribution G, are
. /
∫ ∫ ( ) ( ) (4.5)
∑ ( )
where is the indicator function, equal to 1 if is true, and equal to zero otherwise. This is a
standard logit formula derived by McFadden (1974). However a problem arises due to the presence of
unobserved bank and ATM characteristics, . The price, e.g. surcharge or deposit service fee, is
endogenously determined because banks observe the and take them into account when setting price.
Prices are then expected to be correlated with . This requires use of instruments in the estimates. 9
First, we consider the simple logit model without heterogeneity for consumer choice to ATM use. The
main assumptions are as follows,
(Assumption 1) Each consumer for cash-withdrawal uses the most preferable one unit of the
ATMs.
(Assumption 2) There exists the outside option.
(Assumption 3) The random component of the utility specification across ATMs and consumers,
, are independent and identically distributed (IID) across both ATMs and consumers.
(Assumption 4) The distribution of consumer preferences over the unobserved product
characteristics, is the extreme value distribution, i.e. ( ( )).
(Assumption 5) The term captured the heterogeneity in consumer preferences for observed bank-
and ATM-characteristics is zero.
(Assumption 6) All customers are identical in their valuation of the observed banking ATM
characteristics for all bank j and in turn the parameter estimated by logit model, , and , is to
be assumed invariant coefficients of observed demand characteristics across consumers.
8
The mean utility of outside financial institution for ATM cash-withdrawal service is not identified on the model using pricing on
individual surcharge cost, but the outside alternative is Credit Unions in the model using the price on deposit service fee.
9
Note that standard instrumental variable method is prohibited when the enter the model nonlinearly in random coefficient
model with consumer heterogeneity.
14
In Assumption 1-6, the equation (4.5) is equivalent to the market share, , for bank j at time t.
Normalizing the mean utility is uniquely identified by taking logarithms and substituting market share of
the outside option from each market. The standard multinomial logit model with observed product
characteristics is then,
( ) ( ) (4.6)
Cross-price and own-price elasticities of demand can be computed by following,
{ } (4.7)
( )
This simple logit model gives a convenient formula with a closed from solution and a few
parameters to estimate. However, the simple logit model restricts consumers to substitute toward other
banks only in proportion in market share, regardless of what characteristics contain on model. These
cause two problems in the price elasticities (Nevo, 2000). The first problem is the cross-price elasticities.
For example, if the price of deposit service fee of one bank goes up, we expect more consumers to
substitute to another bank than to keep their account if consumer does not use their own deposit-holding
ATMs. The second problem is the own-price elasticities that i (1 sjmt ) is a constant because most cases
market share, sjmt , is small. Moreover, a standard pricing model predicts a higher markup for a lower price
of one bank because it causes a lower elasticity. This is possible only if the marginal cost of a lower price
is lower than that of a more expensive banking service price.
4.1.3. Demand Model with Interaction Term of Observed Consumer’s Characteristics

To construct the additional moment conditions which relate consumer demographics to cash-withdrawal
preference, the model should be interacted with consumer demographics on demand system. Because the
model without consumer differences in utility might produce the demand substitution pattern depending
only on market shares without the characteristics for banks. That is, different consumers assign different
utility to same choice to ATM use because of different consumer’s tastes. Here I use a linear model of
utility that consumers maximize their indirect utility by banking ATMs’ service from a bank in market
at time t (Berry, Levinsohn, and Pakes, 2004). This model allow for making the interacted linear
demand model so that providing accurate measures of substitution patterns with preferences of observable
and unobservable determinants.
15
Let n index the bank characteristics, including a price term and a vector of expected
distance, , and represents the observed consumer’s characteristics. Model is then,
∑ ̃ with ̃ ̅ ∑ (4.8)
where is bank’s characteristics including the price of services and distance is denoted by . The
is observable consumer demographics such as household income, education, race, bank types, e.g.
Commercial banks, Saving banks, and Credit Unions, and cash-frequency on banking ATMs.10 The is
unobservable consumer characteristics, and the bank’s unobservable characteristics is which is
included in market- and time-specific effects. The demand system for consumer choice model is found by
substituting equation ̃ in (4.8) to obtain,
∑ ∑ (4.9)
where ∑ ̅ . To specify the demand model, consumers are identified by * +,
banks are indicated by * +. The set of possible bank’s characteristics by are a cost of foreign
fee, the number of shared ATMs’ networks and branches of bank j, the number of employees per branch,
the interest rate of deposit and loan, the expected distance of available ATMs for identical banks across
MSA and so on.
I have a developed data to measure approximate distance using Euclidean distance which is in
conversion of the latitude and longitude to radians. Hence the variable distance, , between two
identical banks or ATMs among counties or MSAs are captured by the expected distance for each bank in
market m so that we estimate the results the parameter from equation (4.2). For example, I generate the
market surface, i.e. M in equation (4.2) using Euclidean distance to compute it for bank j. Because I
directly cannot measure the travel distance between consumers and banks, I use it as proxy value. A
decision from banking ATMs is then affected by due to different preference about places of banking
ATMs.
I follow several parametric assumptions on the form of ̃ , the ̃ represents consumer i’s taste
for bank characteristics n (Berry, Levinsohn, and Pakes, 2004). I assume that the is an idiosyncratic
error of consumers and banks, and this error is to be independent of product and consumer characteristics.
The vector z include consumer characteristics that are the consumer demographics in market m at time t,
10
2008 and 2009 Survey of Consumer Payment Choice distributed by Federal Reserve Bank of Boston. County or MSA income
level and population are collected from US Census Bureau and BEA.
16
while the vector v is unobservable consumer characteristics meant to capture time-constant individual
characteristics including overall taste for bank consumer choosing a ATM, such as bank’s brand loyalty to
a particular bank, and current deposit status of all banks. Note that this utility function allows consumers
to differ in their tastes for different bank characteristics. Those differences, ̃ , depends on both consumer
observable characteristics, , and unobservable characteristics, .
Therefore, equation (4.9) defines a traditionally random coefficient discrete choice model with
choice-specific constant term, . Given parameter assumption on ( ) , we can obtain consistent
estimators of parameter vector ( ) from consumer demographics without assumptions about

the unobservable component, . The coefficient, ( ), will be identify own-and cross-price
elasticities for banking ATM characteristics when estimated parameter of ̅ is not zero. The choice-
specific constant is itself as a function of bank characteristics. Hence, to compute the pricing impact, we
need to know the impact of price on , that is we need ̅ . Because the price elasticities embodied by price
increase by values of estimate ̅ , it represents the patterns of substitution across banks. The substitution
pattern by price term is affected by the choice of banks (Berry, Levinsohn, and Pakes, 2004).
Equation (4.9) indicates that the number of observation on that can be used to estimate ̅ equals
the number of bank characteristics. Consequently we cannot identify ̅ without the assumption on the
joint distribution of ( ) because the data of consumer demographics affects on estimates of the
parameter in demand model. As noted in BLP (1995) and Nevo (2000), different assumption on the joint
distribution of ( ) can be used to identify the remaining parameters. To account for the identification
problem (BLP, 1995), we thus assume the is mean independent of the “non-price” characteristic of all
of the banks.
4.1.4. Random Coefficient Logit model with Consumer Heterogeneity

Our goal is now to estimate the nonparametric identification of the random coefficient logit model,
because fixed coefficients in consumer utility function are a function both of fixed parameters that
multiply consumer’s observed characteristics and their unobserved characteristics. That is random
coefficients of individual coefficients. This distribution of consumer preference of banks’ or ATMs’ cash-
withdrawal service is the key feature of demand structural model in that substitution pattern between
banks is induced by consumers under a partial incompatibility. I use consumer demographics with cash-
withdrawal preference implied ATM use, to match the model using predicted average consumer’s
demographics with the average consumer demographics from 2008 and 2009 Survey of Consumer
Payment Choice of Federal Reserve Bank of Boston. That is, to evaluate additional moments I use a
sample average over individual because the available market level data on product characteristics that
17
relates the average demographics of consumers to the characteristics of product (Petrin, 2002). I follow
the notations in Nevo (2000, 2001) and define the random coefficient ( ) in equation (4.9) as
follows,
̅
[ ] [̅] ̂ ( ) ( ) (4.10)
̅
where ̅ ̅ and ̅ are the mean of random coefficients, Di is vectors of demographic variables, captures
additional non-observable characteristics of the consumer, ( ) is a parametric distribution, and ( ) is
a non-parametric distribution derived from the data. The notation of and are matrices of structural
parameters. Note that there are the linear parameters (̅ ̅ ̅) and the nonlinear parameters ( ). Hence
additional assumptions are required to estimate the nonlinear coefficients on demand system, and that is,
(Assumption 7) ( ) has a standard multivariate normal distribution.

(Assumption 8) and are independent.
Because the model allows for consumer observed and unobserved heterogeneity in both taste and
customer willingness-to-pay, i.e., ATM fees of surcharge and foreign fee, for banking ATM use over
cash-withdrawal, drawing a multivariate normal distribution, ( ) , approximate the unobserved
heterogeneity of consumer ATM-preference. Under Assumption 8, allows a different variance for each
components of and a correlation among these consumer preferences. With this assumption on the
random coefficient and , the indirect utility, letting , -11 becomes
12
uijmt jmt ijmt ijmt (4.11)
where jmt pjmt xjmt djmt jmt

and ijmt
. pjmt xjmt djmt / ( Di ) . The term is called
the mean utility, and the last two terms captures the deviation from the mean utility. That is,
the indirect utility is explained as a sum of the mean utility level which is common to all consumers, i.e.
jmt is independent of consumer characteristics, and the last two terms, ijmt ijmt , represent the mean-
11
enters the estimation linearly, enters the estimation non-linearly.
12
( ) ( ) ( )
( ) ( ) ( ) ( )
( ) ( )( )
18
zero heteroskedastic deviation from the mean utility in order to capture the effects of the random
coefficients.
Consumers choose the highest utility when the individual is defined as a vector of demographics
and product specific shocks. The set of consumer attributes patronizing to the choice of banking ATM j,
which is given by,
( ) ( Di i mt i mt i mt ) uijmt ui mt (4.13)
where , , , and are observed product characteristics, expected distance located their ATMs,
prices, and mean utilities of all the products. The market share of bank j is an integral over the mass of
consumers in the argument, ,
sjmt ( ) ∫ ( )
∫ ( ) ( ) ( )
∫ ( ) ( ) ( ) 13 (4.14)
where ( ) denote population distribution functions. Our goal is thus to estimate a distribution for
coefficients, i.e. , which is the nonparametric identification of the random coefficient logit
model. The each consumer’s random coefficient vector is therefore a draw from a distribution of
parameters, if there is a continuum of consumers in market m. The market share of bank j is,
exp( jmt ijmt )

J (4.15)
1 ∑km 1 exp( kmt ikmt )
where denotes probability that consumer type i will use bank j’s ATMs at market m and time t.
Equation (4.15) thus adds up the market share of different types i of consumers based on how common
that type i is in market m. The price elasticity, i.e. cross- and own-price elasticity, of market share of bank
j with respect to price of product k is,
∫∫ ̂ ( ) ( )
sjmt pkmt
{ } (4.16)
jkmt pkmt sjmt
∫∫ ( ) ̂ ( ) ( )
13
Under Bayes’ rule, D , v and is assumed to be independent.
19
Equation (4.16) allows for somewhat more flexible substitution pattern than a logit model. Cross-
and own-price elasticities of demand are no longer the results of the chosen functional form and cross-
price elasticities are larger for products that are closer in terms of their characteristics. Therefore the
random coefficient logit model allows for somewhat more flexible substitution patterns. 14 The
characteristics of banking ATMs might be estimated in that consumer types are different in a given
different product characteristic by the distributions of consumer type I in a given market. This implies to
compute how market share generate for each market using estimated parameter with an initial set and in
turn choose a new set of parameter to try to get closer match.
4.1.5. Marginal Costs

In the model, the market share depends on price and disturbance terms but ATM surcharge cost (or
deposit service fee) will also depend on disturbance term of supply system. This is an issue of
simultaneity problem (BLP, 1995). Because, the discrete choice model captures some relevant consumer
behavior but there is likely loss of richness in the demand model with more preference characteristics, if
individual consumer preference is relevant to consumer’s decisions. We thus need cost functions to
capture the consumer efficiency choice. Note that the profit function for banking ATMs is consisted of
the surcharge and costs will increase to maximize the profits. The demand system profits of bank j are
given by,
∑j j
{( j ) sj ( x )} FCj (4.17)
where j is the set of banking ATMs produced, by bank j, the j is defined by individual surcharge costs,
and FCj is fixed cost. M is a size of market defined by Metropolitan Statistical Areas (MSAs). Hence the
first order condition with respect to the price of ATM service for bank j is,
s
sj ( d ) ∑ j
( ) (4.18)
in equilibrium, the price is equal to marginal costs plus mark up (Berry, Levinsohn, and Pakes, 2004,
Petrin, 2002)15. Assuming the term of ( ) followed by J by J matrix,
14
Sometimes use in the nested logit model to get a more flexible substitution pattern (Knittel and Stango, 2008). However, in
many cases the a priori division of banks into groups will not reasonable, assuming of iid shocks within a group. The reasons are
that the division of segments does not fully account for the substitution patterns. Furthermore, the nested logit does not help with
the problem of own-price elasticities.
15
According to Berry, Levinsohn, and Pakes (2004), incorporated a cost model is, ( ), rewriting with
( ), ( ) ( ), then model is, ( ( ))
20
s
{ } (4.19)
The first order condition with vector notation of (4.19) becomes,
sj ( d ) ( d )* + (4.20)
The marginal cost of bank j is rewritten as follows,
j ( d ) sj ( d ) ( d ) (4.21)
The cost function, taking log-formation, becomes,
( j t) . ( d )/ j t j t, (4.22)
where is a constant coefficient to be estimated, is an unobservable vector of cost differences, and

represent product characteristics to demand system. The terms are to be greater than zero.16 Note
that the price instruments will use as cost shifters of ATM deployments.17 BLP (1995) also use own and
product characteristics and cost shifters of competitors as instruments. Because, in an oligopoly model,
Nash price-cost markup depends on relative substitutability of product which is important to make a
distinction between own and rival products.
4.2. Bank Behavior of Banking ATMs’ Choice

The banking ATMs typically allow customers to electronic use for financial transaction. Banks served
ATMs on circumstance reducing costs by automatically task of banks. Though ATMs can perform more
complicated transaction such as deposits, checking account balance, or loan payments, the most common
task is a cash withdrawal. Generally, the banking ATM fees are consisted of two parts: surcharge and
foreign fee, which occurred by foreign transactions as use the other ATMs rather than a consumer own-
bank ATMs. The ATM provider or banks can charge depend on whether other ATM provider is banks or
non-banks.18
16
Researchers have traditionally included product characteristics as determinants of marginal costs.
17
See the Section 5.2. Instruments
18
A bank, for example, defined by A, can charge its own customers a foreign fee, , for each transaction made a bank B’s
ATMs. Bank A can charge it own account holder a foreign fee , , for each transaction made at institution B’s ATM. If bank B
21
The optimal choice of ATM network is determined by the shared ATM network grows, as the
numbers of new banking ATMs enter the market. If the number of ATMs between banks is identical, then
consumers will be indifference between ATMs. But if it is differentiated, then new ATM deployments of
entrants will attract customers from market expansion.
In consumer’s choice of ATM networks, I assume that consumer can observe ATMs’ locations and
ATM fees defined by surcharge and foreign fees. The fixed costs, denoted by FC, need to provide banking
ATM. Given homogeneous goods of ATM’s demand, i.e. demand for cash withdrawal, entrant enters until
profits are driven to zero as the free entry model. The banking ATM profits do not depend on the
interchange fees only in the symmetric circumstance providing ATM cash-withdrawal service between
two banks, which bank pay to each other through the network operator. But, in asymmetric environment,
the interchange fee then becomes potentially relevant on banking ATM revenue. Because it is transfer
between banks and not cancel out when adding up the banks’ profits. The interchange fee may serve as a
bank strategy to soften competition for deposit market (Matutes and Padilla, 1994, and Donze and Dubec,
2006).
Bank profits may obtain from an aggregated supply model as the sum of bank’s profits, that is,
∑ ( ) sj ( d )
( d ) ∑j j
Nj (fj j ) sj ( x ) N FCj
{ ∑j j N j ( j j ) s j ( x ) }
∑ ( ) sj ( d )
N FCj (4.23)
{ }
where Nj is the number of Jth banking ATM and N j is the number of banking ATMs of competitor of
bank j, and is marginal costs of banking deposit service. The j represents the set of banking ATMs
produced, M is a market size defined by MSA market m, and denotes deposit service fee on checking
account. In addition, I assume interest rate of deposit when occurred to open the account for customers,
denoted by , bank earn profits by the amounts of the interest rate of consumer’s loan which generate on
a deposit side, denoted by .
allow charging to surcharge, then bank A will also impose a surcharge, defined by , for each transaction by bank B’s
customers at bank A’s ATMs. Conversely, bank B can charge its own customers a foreign fee, , for the use of bank A’s ATMs
and a surcharge fee, , for transactions by bank A’s customers at Bth bank ATMs. If firm B is a non-bank, then since bank A has
all the banking customers, bank A can set a foreign fee (but not a surcharge) and firm B can impose a surcharge (but not a foreign
fee) on transactions made by A’s customers at B’s ATMs (Croft and Spencer, 2003).
22
A strategic behavior of banks arises when consumer observe banking ATMs, because banking
ATMs compete the price relies on equilibrium price for ATM cash-withdrawal service. It might be led to
price competitive effects. The strategic behavior to maximize profits for jth banking ATMs is following
two stages: first banks choose an optimal size of their ATM network, and they then choose optimal ATM
cash-withdrawal fees. Assuming j is the set of banking ATMs produced for bank j at time t, I rewrite the
profits functions as follows,
∑j j
R(Nj N j ) N cATM
j N FCj (4.24)
where represent profits for retail banking deposit/loan service, i.e. ∑ (
) sj ( d ), j is the set of banking ATMs’ deployment, and represent total ATMs’ fixed
costs. The first term of the profit function, , does not depend on N in order only to measure the cash-
withdrawal demand. The ATM demand to cash-withdrawal service for consumer depends on the
availability of ATMs, i.e. N. Assuming that ATM demand for cash withdrawal is an increasing function
with respect to N and average distance to growing the number of ATMs is decreasing with respect to N.
This implies that an increase in available banking ATMs leads an increasing in total number of cash
withdrawal, unless the demand for cash withdrawal is inelastic with respect to N.
I assume that aggregate demand for banking retail deposit services is independent of N. Because I
do not directly observe bank’s profits in the market m at time t. But banks have different margins to the
number of ATMs that affects the banking ATM profits by deploying costs of ATMs. The banking ATM
profits of bank j’s ATMs, when existed, is,
∑ Β R( ) ( ω ζ ) (4.25)
th
where R( ) denotes the revenue of the j banking ATM network with its competitors’ one, denoted
by . The represent the fixed cost to deploy ATMs, ω is a vector of cost shifter to measure the
marginal cost of it, ζ are parameters to be estimated, and captures costs differences among banking
ATMs that are error terms. The expected profit of bank j’s ATMs is,
E0 Β 1 E 0R . Β /1 E[ ( ωζ )] (4.26)
where Β is the set of banking ATMs.

Given characteristics of homogeneous goods to cash-withdrawal demand of consumer’s ATM
23
use, optimal number of ATMs can be analyzed by the model of Mankiw and Whinston (1986) in that
entrant enter until profits are driven to zero. The ATM deployments of entrants play about entry.
Incumbents anticipate that entrants of installing ATMs of new local area will have the opportunities to
make decisions about entry. The last entrant finds entry profitable, additional entry is not profitable. Thus
Nash equilibrium can be represented by an ordered pair defined by ( , ), where is the number of
incumbents’ banking ATMs and is the number of deploying ATM’s banks (or entrants) or network for
rival in any market, the total number of ATMs of the banks are defined by N (Mazzeo, 2002).
The banks choose the number of shared ATMs, N, to maximize their joint profits. The optimal
number of ATMs is N= 0 if
( ) ( )< (4.27)
and N = n > 0 if
( ) ( )< ≤ ( ) ( ) (4.28)
where marginal joint profits in nth ATMs should be positive, and the marginal joint profits in n+1th ATMs
should be negative. These are necessary condition for joint profit maximization. They are also sufficient if
the joint profits ( ) are concave in N, or equivalently if the marginal joint profits are decreasing in N
(Bresnahan and Reiss, 1990). In order to analyze the empirical model for ATM optimal choice, I assume
that there is a prediction error which is difference between banking ATMs’ profits and expected their
profits, due to different profit of competitor’s ATMs. Note that the expectation error, , is mean zero
conditional on the set of ATM network, that is
E, Β - (4.29)
where R. Β / E 0R . Β /1 . The necessary condition for profit maximization is that
the profits of ATMs of bank j for choosing the number of ATM networks, , are great as its expected
profit form choosing or . This necessary condition is also sufficient when profits are concave
in N. An optimal choice of hence satisfies
E0 ( ω ζ) Β 1 E0 ( ω ζ) Β 1
E0 ( ω ζ) Β 1 E0 ( ω ζ) Β 1 (4.30)
24
This implies the following condition using equation (4.26) and (4.28),
E 0R( ) R( ) Β 1≤ ωζ ≤ E 0R( ) R( ) Β 1 (4.31)
5. Data Descriptions
The data required estimating the structural model consists of market shares for each bank at each market
as well as bank/ATM characteristics, e.g. surcharge, foreign fee, deposit and deposit interest rate, loan
and loan’s interest rate, the number of banking branches and ATMs, and so on. The core dataset is the
Federal Financial Institutions Examination Council (FFIEC) collected from 2008 through 2009 consisted
in data-set with quarterly time-series variation, focuses on data from 320-Metropolitan Statistical Area
(MSA) given by reports of Condition and Income (Call Reports) and Summary of Deposits (SOD).
Table 4a. Basic Statistics for Banking ATM Characteristics
Variable Average Standard Deviation Minimum Maximum

Banking ATM Characteristics
Surcharge ($) 2.368 0.515 0 3
Individual Surcharge Cost ($) 2.364 0.245 0 2.952
Foreign fee($) 1.743 0.839 0 3
Individual foreign fee Cost ($) 1.762 0.370 0 2.827
Off-premise ATMs* 7.873 10.568 15 153
On-premise ATMs (Banking ATMs)** 207.001 444.157 26 5800
ATM cost a 0.041 0.035 0 0.526
Interchange fee Bank Credit Card/Total Deposit (%) 0.138 0.099 0 0.643
ATM interchange fee for Bank/Total Deposit (%) 0.004 0.015 0 0.393
Density of off-premise ATMs 0.546 0.261 .07 0.970
Bank Characteristics
Num. of Branches 112.744 163.917 1 989
Num. of Employees per Branches 32.334 30.030 6 543.315
Num. of State
14.250 9.772 1 29
(Providing Banking Service)
Large Bank***
0.876 0.329 0 1
(over 10 Billon $ for Assets)
Medium Bank***
0.102 0.302 0 1
(from 1 Billon $ to 10Billion for Assets)
Small Bank***
0.021 0.145 0 1
(under 1Billion $ for Assets)
Banking Service Price/Total Deposits 0.004 0.002 .00003 0.037
Branch Density 0.219 0.124 .0008 1
Branch of Inside Market/Branch of Outside Market 0.389 1.810 .0001 30
Interest rate for Deposits (per branch) 0.007 0.003 .0019 0.022
Interest rate for Loans (per branch) 0.029 0.007 .0153 0.074
Average Market Share for each MSAs 12.638 9.855 .0022 76.992
HHI for Bank’s Market Share 0.134 0.070 .0439 0.680
Notes: Number of observation is 61535 over 2008 and 2009.
a
The variable of ATMcost (%) represents sum of ATM expenses and telecommunication expenses that are normalized
to total deposits
*
Each zip-code from NYCE datasets during 2008 and 2009.
**
per MSA
***
Indicator variable, for example, equal to 1 if bank A is large and equal to zero otherwise
25
The data is constructed by combining information from several different sources which are Call
reports, Summary of Deposits, NYCE and PULSE ATMs, Bankrate.com, U.S. Bureau Economic
Analysis and U.S. Census Bureau. Such a data-set describe in Table 4a. Table 4a summarizes the data of
banking ATM characteristics, needed to estimate the consumer utility function for banking account
services. Information about which depository institutions served each local banking markets and bank
characteristics obtained by Summary of Deposits (SOD) which is quarterly based on data for the number
of branch, income and fee ATMs and interchange fees, the number of employee and the amount of salary
for employee, deposit ($), loan ($), and other bank’s characteristics. These variables will be applied to a
panel of U.S. banking data over the sample period 2008-2009, and I compute the bank-level deposit/loan
interest rate, as the ratio of interest expense on deposits to deposits and of revenue on loans and leases to
loans and leases per each year. The variable on ATM fees are obtained by Bankrate.com, counting
institution, annual interest rate, minimum balance and minimum balance to avoid fee, monthly fee,
foreign fee, and surcharge for each market in 2008 and 2009. 19 The third dataset to capture the
approximate number of ATMs for bank j at market m contains information for ATM’s institution, address,
city, and ATM access 24 hours from NYCE and PULSE ATM locator20, and thus rearranged the number
of ATMs based on 5 digits zip-code to match the U.S. banking data, this data include off-premise ATMs
for banks and non-banks where locate in out of banking branches. To estimate market share for Credit
Unions which is the outside option in the demand system with price term of deposit service fee, I compute
the fraction of its total deposits according to its branches in the market. This data is obtained from the
Financial Performance Reports of the National Credit Union Association. The logged formation of the
market share of outside options include into the dependent variable in empirical model as subtracting by
taking log of values of the commercial bank’s market share.
I collected the data of population and income for MSA from U.S. Census Bureau and U.S. Bureau
of Economic Analysis as an observable individual characteristic is described in Table 4b. This is needed
to estimate the consumer utility function for banking ATM industry. This provides a group-level of
information on median income levels, total population, and zip-code for location. The average value of
population and income in each market thus match with constructed banking account data. This aggregate
data enables to identify the effect of individual and banking characteristics on banking deposit service. I
examine the empirical model managing in different MSA markets21 using ATM relevant data to explore
19
Use a website: http://www.bankrate.com and gather the information from its checking and savings rate among counties
20
NYCE ATM(http://www.nyce.net/atm/locator.jsp),
PULSE ATM (https://www.pulsenetwork.com/public/consumers/pulse-atm-locator.html
21
MSA market from FDIC data set
26
consumer welfare and surcharge/foreign fee effects of a partial incompatibility. Over the period 2008-
2009, the data contains approximately 300-bank, 320-MSA-County given by FDIC.
The micro data set for consumer demographics use the 2008 and 2009 Survey of Consumer
Payment Choice distributed by Federal Reserve Bank of Boston. The sample size for this survey includes
876 respondents for 2008 and 1010 respondent for 2009, respectively, which include consumer
demographic variables such as family income, race, age, education level as well as frequency of cash-
withdrawal per week, per month, and per year. This data set also show amounts of cash-withdrawal when
respondent in this survey visits banking branch or ATMs and represent that respondent whether rewards
to debit card usage as an indicator variable by yes (indicated by 1) or no (indicated by 0).
The average value of demographics is a consistent estimator of demographics but it is no longer
efficient if we know given prior probability of, for example, education attainment. Incorporating weights
need to increase a precision for estimation (Hellerstein and Imbens, 1999). To increase efficient for
average levels of demographics, I use a weighted average of the average in the sub-population by age
group. Such a weighting makes the sample more representative of population by correcting the relative
weights by age groups. I calculated separate estimates for age groups defined by racial groups and
education attainments, respectively. For example, I compute a weighted average incidence across groups
of education attainments and groups of race, respectively. The prior probability for computing the weights
are based on the 2008 and 2009 level of education and race of U.S. Census data, which is an average of
functions of Census variables. I estimate the weighted proportion of demographics for survey data which
is the Consumer Payment Choice distributed by Federal Reserve Bank of Boston, using a prior
probability obtained from U.S. Census data, by age group. Such an age group is defined by 25 to 34, 35 to
44, 45 to 54, 55 to 64, 65 to 74 years old, and over 75 years.
5.1. Banking ATMs and Consumer Characteristics

Surcharge and foreign fee (individual costs)
Note that the relative probability using bank j’s ATMs for foreign-customer is and the relative
probability deposit holding consumer of bank j using foreign banking ATMs is . I assume that
consumers use a foreign bank’s ATMs in proportion to that bank’s share of the total network. If the
number of transactions is performed by a customer of bank j in market m, the relative probability to
choosing foreign banking ATMs equal to , where T is a constant. ATM surcharge fee exempts at
which home-customer of bank j use affiliated banking ATMs. Foreign fee also follow the same
procedures. The surcharge cost and the foreign fee cost is, respectively,
27
J J J
T ∑km 1 k j kmt kmt
T ∑km 1 kmt kmt
T jmt jmt
T ∑km 1 kmt kmt
(5.1)
J J J
T ∑km 1 k j kmt fkmt T ∑km 1 kmt fkmt T jmt fjmt T ∑km 1 kmt fkmt (5.2)
where the bank j’s surcharge does not include in ∑Jkm 1 kmt kmt
because bank j’s customers exempt from
them. The notation, kmt kmt
, is a market specific vector that applies to all choices, it uses as the price
term of the random coefficient logit model. The individual foreign-fee cost is ∑Jkm 1 kmt fkmt as dropping T
from this term and it indirectly reflects the trade-off between ATM fees and foreign ATM use by
convenience when consumer faces to make decision about ATM use.
ATM Density of off-premise ATMs

The variable ATM density is collected by combined two data sources: Summery of Deposit and NYCE
ATM locator. The data for the number of banking branch and ATM comes from Summery of Deposit due
to banking branch at least having one their ATMs. But off-premise ATMs, located out of banking
branches, is collected from NYCE ATM locator. Total number of ATMs is then combined with two data
sets, and ATM density of off-premise is computed by the total number of banking ATMs to the number of
off-premise ATMs for each market.
Table 4b. Basic Statistics for Distance and Number of Competitor and for Consumer Characteristics

Distance Measure
*
0.0097 0.0230 0 0.7995
Number of Competitors within 2miles** 6.5212 12.2671 1 153
Consumer Characteristics
Avg. Household Income 56.72714 14.31172 28.855 114.2
(per County, $1000)
Avg. Income (log)*** 18.140 1.579 14.464 20.764
Avg. Earning by Place of Work (log)*** 17.849 1.626 13.569 20.500
Per capita Income (log)*** 10.616 0.191 9.889 11.278
Avg. Population (log)*** 14.431 1.451 10.918 16.763
Source: U.S. Census Bureau and Bureau of Economic Analysis
Notes: Number of observation is 61,535 over 2008 and 2009.
*
Square root law is used to measure consumer’s travel distance, which calculated by equation (3.2) where N is the number of
shared ATMs of bank j and M is total market distances on per MSA derived by Euclidean distance of equation (5.3) and K is a
constant of proportionality which is the number of banks with holding shared ATM networks
**
including off-premise ATM competitors.
***
per MSA
Distance Measure
A vector of distance follows the method of the square root law in equation (4.2) so that measure the
expected distance to the nearest ATMs between the consumers’ and ATMs’ location for each markets. In
28
order to measure to market surface among banks for each market, I employ Euclidean distance. Using the
geographical coordinates’ data from US Census Bureau, I compute a spherical distance between banking
ATMs for each markets22, that is as follows,
{ ( √ )}
( ) ( )
( ) ( )
( ) ( ) (5.3)
where r is the mean radius of the Earth (3,958.761 miles).
Number of Competitors
The number of competitor is key variables to analyze the competition effects on this model. Given vectors
of Euclidean distance from measuring equation (5.3), I defined the distance between two banks at each
market. For example, if there are 20 banks at one market, the distance is defined by matrix, e.g. 20 by 20.
This matrix reflects sites between banks so that the number of competitors is computed by the expected
distance. That is, I classify competitors by distances: the number of competitor within 2 miles, 5 miles,
and 10 miles, which shows in Table 4b.
Micro Data of Consumer Demographics:

The micro data of consumer demographics obtains from the 2008 and 2009 Survey of Consumer Payment
Choice of Federal Reserve Bank of Boston. The data represent the ATMs’ consumer demographics which
are the number of cash-withdrawal and cash amount of that. The demographic variables describe are as
indicators, I rearrange the data of Household Income, Age, Education Level, and Race to ranked data,
which are reported in Table 4c. The prior probabilities and survey probabilities to draw weighted average
of the average in the sub-population by age group are illustrated by Table 4d and the weighted
demographics for race and education attainment which the estimated weights multiply the survey data for
them are shown by Table 4e.
22
This is accomplished by haversine formula
29
Table 4c. Basic Statistics for Consumer Demographics of Micro-data

Household Income a 3.519 1.671 1 7
Age 49.879 14.143 18 87
Education Level b
:High School 0.149 0.356 0 1
:Some College 0.352 0.478 0 1
:College 0.268 0.443 0 1
:Post-graduate Studies 0.212 0.409 0 1
Race c
:White 0.854 0.353 0 1
:Black 0.068 0.252 0 1
:Asian 0.021 0.145 0 1
:Latino 0.021 0.144 0 1
Reward debit (Yes (1) or No (2)) 1.670 0.470 1 2
Cash get from ATM (Yes (1) or No (0)) 0.731 0.443 0 1
Cash get from Branch (Yes (1) or No (0)) 0.133 0.340 0 1
Avg. Num. to use ATM for Cash per Year 3.673 3.017 0 21.741
Avg. Num. to use Branch for Cash per Year 2.508 1.797 0 8.696
Avg. Num. to Cash-withdrawal per Year 10.013 11.360 0 52
Avg. Num. to Cash-withdrawal per Month 2.226 1.095 0 6
Avg. Num. to Cash-withdrawal per Week 1.417 1.006 0 10
Cash Amount to Cash-withdrawal ($)* 110.176 121.571 0 970
Cash Amount to Cash-withdrawal ($)** 55.589 154.313 0 2500
Avg. Num. of Cash-withdrawal* 3.635 3.471 0 43.482
Avg. Num. of Cash-withdrawal ** 1.129 2.092 0 26.089
Source: The 2008 and 2009 Survey of Consumer Payment Choice distributed by Federal Reserve Bank of Boston
Notes: a the ranked data, 1: under $25,000 per year for household income, 2: $25,000-49,999, 3: $50,000-74,999,
4: $75,000-99,999, 5: $100,000-124,999, 6: $125,000-199,999, and 7: over $200,000
b
A binary indication, for example, that equal one when respondents have an education level such as “college” and zero
otherwise
c
A binary indication, for example, that equal one when respondents are “White” and zero otherwise
*
indicate first preference payment source, for example, banking branch or ATMs, for respondents
**
indicate second preference payment source, for example, banking branch or ATMs, for respondents
Table 4d. Estimated Probabilities of U.S. Census and Consumer Payment Choice by Age Group

Education Attainment a
: 0.215 0.075 0.067 0.381
: ̂ 0.265 0.078 0.013 0.377
b
Race
: 0.680 0.208 0.029 0.833
: ̂ 0.779 0.259 0.002 0.967
Source: The 2008 and 2009 Survey of Consumer Payment Choice distributed by Federal Reserve Bank of Boston and
U.S. Census Bureau
Notes: a The group of education attainment by age group: the group of education is classified by “high school”, “some
college”, “college”, and “post-graduate studies”, and age group is defined by 25 to 34, 35 to 44, 45 to 54, 55 to 64, 65
to 74 years old, and over 75 years
b
Racial group by age group: the group of race is classified by “White”, “ Black”, “Asian”, “Latino”, and otherwise,
and age group defined by 25 to 34, 35 to 44, 45 to 54, 55 to 64, 65 to 74 years old, and over 75 years
represents a probability to the groups of education attainment (or race) by age group, using U.S. Census data
̂ represents a probability to the groups of education attainment (or race) by age group, using Survey data of Consumer
Payment Choice
30
Table 4e. The Weighted Consumer Demographics for Education Attainment and Race

Weighted Level of Education Attainment a
:High School 0.317 0.755 0 2.527
:Some College 0.282 0.383 0 1
:College 0.197 0.322 0 1.030
:Post-graduate Studies 0.301 0.496 0 1.181
Weighted Level of Race b
:White 0.783 0.268 0 1
:Black 0.114 0.440 0 5.280
:Asian 0.043 0.317 0 4.847
:Latino 0.066 0.509 0 6.349
Source: The 2008 and 2009 Survey of Consumer Payment Choice distributed by Federal Reserve Bank of Boston and U.S.
Census Bureau
Notes: a Estimated weights by age group of education attainment times the level of Education obtained from Survey of
Consumer Payment Choice
b
Estimated weights by age group across racial groups times the level of race obtained from Survey of Consumer Payment
Choice
5.2. Instruments
Instruments will have to use to treatment of endogeneity for consistent estimation. The reason to need
instrument is that price terms might be a function of unobserved product characteristics. Furthermore the
structural model for demand and supply require instruments with features that instruments for both
demand and supply are uncorrelated with unobservable error terms. A vector of bank-and ATM-
characteristics is included in the demand instrument, but both the term of price is not included in
instrument due to endogeneity. When banks are set the price in that they know it, consumer is also
assumed to be know this price and decide make decision to open their deposit account base. As a result,
the price is likely to be correlated with error term. That is, deposit service fee and individual surcharge
cost might also correlate with the unobserved characteristics.
Table 5. Basic Statistics for Instruments

Min. Balance to Avoid Fees ($1,000) 2.211 3.644 0 20
24 Hrs. Availability of Nonbank ATMs* 0.722 0.448 0 1
Interchange fee of Bank’s Credit Cards** 0.0013 0.0010 0 0.0064
Expense on Premise and Equipment*** 0.0024 0.0006 0.0004 0.0089
Other Expenses*** 0.0016 0.0007 0 0.0126
Cost of Credit Risk *** 0.0072 0.0045 -0.0019 0.0558
Sources: NYCE ATM locator, Bankrate.com, and Summary of Deposits (SOD)
*
Binary indication: Yes (1) and No (0)
**
Normalized by total deposits
***
Normalized by total assets
In this paper, there are two types of price terms: deposit service fee and individual surcharge cost.
First, I capture the instruments for deposit service fee from Call Report as variables of cost-shift. Because
31
banks should account for costs when deploying ATMs or branches, the deposits service fee and these
costs should not be correlated with banks-and ATMs-demand for consumers. These cost-shift variables
are following: (1) Expenses on premises and equipment, and other expenses, denoted by IV1, are both
operating cost variables. Premises and equipment expenses include expenses on utilities, janitorial
services, repairs, furniture, etc. (2) Other expenses include legal fees, postage, deposit insurance
assessments, directors’ fees, and so on, that are indicated by IV2. (3) The credit risk cost variable
employed, denoted by IV3, is provisions for loan and lease losses. It can be considered as cost shifters as
high credit risk may require higher cost of operation due to monitoring and auditing as shit up cost
functions. All of three instruments are normalized by assets of banking branches (Dick, 2008).
On the other hand, the price on individual surcharge cost also need instruments that are deposit
minimum balance to avoid fee, 24-hour availability of nonbank ATMs, and interchange fee of bank’s
credit cards. The level of minimum balance to avoid fee represents how much is kept in the account and
the fee is levied if the balance goes below this amount. The variable on 24-hour availability of nonbank
ATMs is a binary indication which is shown by Table 5. It affects surcharge cost but it will not be related
to unobserved deposit banking characteristics. Final instrument is the interchange fee of credit cards, it
indirectly illustrates not only the size of banking ATM networks by amount, but relate the interchange fee
of debit cards in terms of average transaction volumes. I will illustrate the weak instrument problem with
a variation on a market share of banks in the section 6.2.
6. Estimation
The BLP (1995) is a model to the logit specification allowing for unobserved bank characteristic and for
observed consumer characteristics with their heterogeneity. This model also based on a micro foundation
it can be adapted to a variety of data types. These interactions in equation (4.11) are different from the
logit model because these free for IIA (Independent of Irrelevant Alternatives) problem and the
aggregated substitution pattern from the model are more reasonable. For instance, if the price of bank j’s
service fee increases, the specific customers will close account for bank j, while most customers who have
a preference for the bank j’s characteristics will choose similar bank in the characteristic space. Therefore,
consumer will substitute to banks that are close to the bank in characteristic space, e.g. from the bank of
America to J. P. Morgan Chase or Citigroup. This implies that price effects will be different for different
banks. Banks with higher service price, but low market shares, will be patronized by customers who do
not respond much to service price. The model then implies that ATM-and bank-use for consumers can be
strategic substitutes in the pricing game.
32
The processing to estimate counters the problems in fact that the market shares are nonlinear
functions of and there is no analytical method for the integrals in market share equation. Hence we need
a simulation-method called contracting mapping (BLP, 1995) to find the value as inverting to solve for
using it, and then market share are simulated using ns random draws of individual consumers for each
markets. Using instruments which should be mean independent of and , we can construct the
moment conditions,
( )
( ) E. ( )/ E4 5 (6.1)
( )
where a vector of demand instruments is, is a vector of supply instruments, and is parameter
vectors. A contraction mapping in BLP (1995) is established that allows to be computed iteratively for
each set of parameters, observable data, and distributions of consumer unobservable. It can be shown that
the contraction mapping given the market share in fact that the market share differs from the standard
market shares using a weighted average of individual consumer choice probabilities. The market shares
can be inverted to solve for using the BLP contraction mapping and then these are the function
approximating the market share of bank j for a guess of distributional parameters and demand shocks .
6.1. The Minimization Routine for GMM

On my data, the consumer individual specification does not enough capture for the richness of choices.
Hence we need to include the unobserved consumer characteristics into this process as the distribution
form so that we deal with the unobserved vector, i.e. v’s vectors in equation (4.10). This implies that
information on the distribution of demographic is useful but the model can also be estimated using the
parametric distribution .23 The following is estimating procedures. As the first step, our key thing is to
analyze the aggregate market share conditional on ( ), the market share, after integrating out the
which is familiar with simple logit model. Note that we can draw the distribution of consumer
characteristics from distribution of the idiosyncratic errors. By using simulation we can find a new
idiosyncratic error into the estimation process. Then we can construct the moment condition that will be
accounted for the simulation error. Because individual consists of K-dimensional vector of shocks that
determine the individuals taste parameters, , and consumer’s demographic variables. We can draw a
distribution from ns taking simulation, to compute the predicted market share, that is,
23
has a standard multivariate normal distribution
33
. /
̂ ( ) ∑ (6.2)
∑ ( )
Second, we consider to recover the from the market shares. Note that we need to find the sample
moments in order to estimate the unobservable orthogonal condition to estimate using GMM. We thus use
equation (4.11), i.e. . I follow BLP iterating method, that is following,
( ) ( ) ( ) .̂ ( )/ (6.3)
where is an initial market share, ̂ implies estimated market share from ns simulations. As noted
BLP (1995), the iterating of equation (6.3) has a unique solution using a contraction mapping method.
Contraction mapping actually uses in programming of the estimator (BLP, 1995), that is,
. ( )/ . ( )/ (6.4)
̂ ( )
Given parameter ( ) where is in the population of interest to draw ns simulations, we write

in terms of and ̅ as a nonlinear estimation over parameters , using in equation (4.11),
( ) ( ) ∑ ̅ (6.5)
where ̅ , - We now need a set of instruments for supply system, , as well, because the vector
markup, i.e., ( d ) , depend on the parameters of demand system and the term of price. Hence
vector of price also depend on because there is correlation between and . Instrument should
be mean independent of between and , that is, E 0 | 1 E[ | ] E0 1
E[ ] Using instruments (IV) which is the exogenous variable of x to interact and , we can
construct the moment conditions,
∑ ( ∑ ∑ ( ) )
( ) [ ] (6.6)
∑ ( ∑ ∑ ( ) )
where and is instruments for demand-and supply-system. In equation (6.6), ( ) is
iterating until have reached a minimum.
34
6.2. Instruments for GMM

The underlying assumption on instrumental variables is that product characteristics other than price term
are exogenous, and therefore orthogonal to unobserved demand and supply. Given the location of banking
ATMs on the characteristics space, price will be correlated with the characteristics of other characteristics.
The Price term has close to substitute that has lower markups while other products located further away
from rival ones will have higher prices relative to costs.
By letting the demand model with adding flexibility, the additional instrumental variables require
to identify additional parameter on deposit market. I use the specify variables that can act as instruments
for individual surcharging price in the demand system. The price on deposit service fee uses instruments
as follows: expenses on premises and equipment include expenses on utilities, janitorial services, repairs,
furniture, etc, is denoted by IV1, other expenses include legal fees, postage, directors’ fee are indicated by
IV2, finally, IV3 include the information about credit risk by provisions of loan and lease losses. The
price on individual surcharge cost is also instrumented by minimum balance to avoid fee, 24-hour
availability of ATMs, and interchange fee of bank’s credit cards, that is shown by (6.7)
The supply model also require additional instruments for the identification of the additional
parameter, which include other banks’ characteristics such as the rival’s employee per branch, rival’s
branch number, rival’s ATM number, rival’s interchange fee of ATMs, rival’s salary per employee. These
instruments are orthogonal to unobserved product characteristics. Consumer’s bank choice in terms of
some of bank characteristics affects consumer decisions and then enters the specification here, because all
bank characteristics are eventually endogenous. The reason is the bank characteristics which relate to size
such as branch density or ATM density, and whether the bank is in the large or small sized have been
assumed to play a part in the consumer decision and to be exogenous in the specification.
E
[ E ] 24 [ ] 25
R
R E
R
R . (6.7)
R E
[R ]
When a set of instruments is weakly correlated with a price term, i.e. individual surcharge cost, a
large inconsistency is created to estimate the model using instruments because error terms can seriously
24
For deposit service fee
25
For individual surcharge cost
35
bias estimates. That is, instrument variables of weakly correlated with endogenous variable is likely to
produce estimates with large standard errors. One approach to test for presence for weak instruments is
proposed by Stock and Yogo (2005), its null hypothesis is that the estimator is weakly identified in the
sense that it is subject to bias. It is useful test for presence of weak instruments: If the Cragg-Donald or
Kleibergen-Paap Wald statistic is larger than the critical value of Stock and Yogo, we can conclude that
the instruments are strong, otherwise conclude that they are weak. Table 4e shows a set of instruments is
not suffered from existence of weak instruments. The redundancy test for instrument variables whether
they are useful information to identify the model also reject the null hypothesis. As a result, the
instruments are useful in IV estimates because R-square from the first-stage regression which is a set of
instrumental variables on ATM surcharge fee is not approaching to zero.
Table 5b. Testing for Weak Identification on ATM Surcharge Fee26
Variable Test Statistic Chi-square and/or P-value Null Hypothesis

Surcharge Weak Identification Test Equation is weakly
:Cragg-Donald Wald F statistic 252.94 identified
:Kleibergen-Paap Wald rk F statistic 270.03
:Stock-Yogo weak ID test
Weak-instrument Robust Inference Surcharge=0 &
: Anderson-Rubin Wald test Chi-sq(3)= 25.42, P-value=0.0000 orthogonality
: Stock-Wright S statistic Chi-sq(3)= 25.47, P-value=0.0000 conditions are valid
IV Redundancy Test
: Minimum balance to avoid fees 65.976 Chi-sq(1) P-value = 0.0000 Excluded instruments
: 24-hour availability for nonbank ATMs 168.511 Chi-sq(1) P-value = 0.0000 are not "redundant"
: Interchange fee of banks’ Credit Card 521.222 Chi-sq(1) P-value = 0.0000
Notes: Table 5b summarizes the results to testing for IV logit model, ( ) ( ) ,
where is the price term for ATM surcharge fee, is a market share for bank j, and is outside options.
The first-stage regression for price term of surcharge using instruments is significant at the 95% level, i.e., < , it suggest
that the instruments, which are variables on “minimum balance to avoid fees”, “24-hour availability for nonbank ATMs”, and
“Interchange fee of banks’ Credit Card”, may be adequate to identify the equation.
7. Results
Table 6 reports the results for two different price terms: deposit service fee and individual surcharge cost.
First version of the price, i.e. deposit service fee, needs to evaluate the network effects on ATM retail fees.
Two versions of the model are estimated as OLS logit version and IV logit model correcting price
endogeneity for each price-term. First columns and third columns show the OLS results, while the rest of
26
There are two types to test weak instruments (Stock and Yogo, 2005): maximal relative bias and maximal size where null
hypothesis is that instruments are not suffer from the specified bias. That is, the rejection of null hypothesis represents the
absence of a weak instruments problem. Stock-Yogo weak ID test critical values for single endogenous variable of ATM
surcharge fee are as follows,
Maximal IV relative : 5% : 13.91 10% : 9.08 20%: 6.46 30%: 5.39
Maximal IV size : 10% : 22.30 15% : 12.83 20%: 9.54 25%: 7.80
36
the columns show the IV estimation results. The deposit service fee and individual surcharge costs are
instrumented by (6.7). The outside option alternative is defined by Credit Union when using the price of
deposit service fee, while the outside financial institution for ATM surcharge cost is not identified. Table
7a, 7b, 8a, and 8b show the estimated coefficients and interaction terms using consumer demographics
and micro data of consumer demographics, respectively. These tables are estimated as IV Logit model
correcting price endogeneity where price term is a surcharge cost. Table 9a-9d represents the results for
the random coefficient model.
7.1. Logit Model

In Table 6, the estimated price sensitivity, e.g. deposit service fee and surcharge costs, increases when
moving from each OLS model to its IV model. The price sensitivity is more than twice at each model, e.g.
from -0.096 in OLS to -0.218 in IV logit model for deposit service fee and from -0.403 in OLS logit to -
1.111 in IV version for surcharge cost. This implies that correction for price endogeneity is important and
necessary. The coefficient on variable surcharge in column 1 and 2 of Table 6 is not significant, but the
coefficient on foreign fee is significant and positive. The expected coefficient on surcharge is ambiguous
to measure the network effect of banking ATMs. However, the estimated parameter of foreign fee which
measuring customer of unaffiliated ATMs use implies positive trade-offs between ATM fees and
consumer’s convenience. It indicates indirectly the existence of banking ATM network effect. That is,
customer who held banking deposit accounts place positive value on ATM cash-withdrawal service as
increasing the total number of banking ATMs. This variable also supports in model using price term of
individual surcharge costs because the estimated parameter is positive and significant, e.g. 0.204 in OLS
logit model and 0.348 in IV logit model.
The coefficient of Branch, which is measured by the total number of branch in inside market to
the total number of branch in outside market, is positive in both pricing versions. With a positively
expected direction, it is interesting to observe that estimated coefficient is positive and mostly significant.
For example, the coefficient of Branch is 5.671 in OLS logit model and 5.783 in IV logit model, while
that has positively declined magnitude when using price term of individual surcharge cost, e.g. 0.96 in
OLS version and 0.744 in IV logit model. However, the coefficient on ATM density which illustrates off-
premise ATM density of non-banks and banks is negative and mostly significant in both price versions,
because it causes a possibility for consumer to surcharging when using off-premise ATMs.
The coefficient on distance, , is important. It is interesting to observe that estimated
coefficients are negative and mostly significant. This says that customer prefers a bank with large number
of ATMs, which implies increasing distance between one-bank’s ATMs negatively affecting on
consumer’s ATM demand. This result is indirectly supported by the estimated coefficient of number of
37
competitors because the magnitude of estimated parameter of that within 2 mile is positive and significant
in third column and forth column of Table 6, e.g. 0.031 and 0.034, respectively.
The estimated parameter of Large Banks, defined by asset over $10 billion, is positive and
significant in using price term of individual surcharge cost while that of Small Banks, defined by asset
under $1 billion, are negative and mostly significant in both models. This result also supports the
estimated parameter of number of operating state of banks because it is same direction with variable on
Large Banks. Consequently, the consumer’s indirect demand is highly and positively affected by size of
banking ATM networks.
7.2. Logit and IV Logit Model with Interaction Terms
Table 7a and 7b show the estimated coefficients determined by consumer demographics which illustrate
whether a customer choose Commercial banks. The price defined by individual surcharge costs has
significantly interactions with the income level of county. The positive coefficient on an average income
level of county indicates that marginal disutility involving surcharge costs is significantly increasing in
the income level, i.e. 0.216, and that is substantially decreasing a squared income level, i.e. -0.047. In IV
logit model described in Table 7b, such effects are significantly supported, for example, 0.249 to an
average income level and -0.060 to a squared income level. The coefficient on bank types which represent
a binary indication that equal one when a customer choose a Commercial bank and zero otherwise,
illustrate the marginal disutility of the increase of ATM surcharge fee is decreasing on choosing
Commercial banks of consumer in logit model, while in IV logit model this is not significant.
The one of important variables to explore the consumer convenience, , has significantly
negative sign in both model, i.e. -0.884 in Table 7a and -2.583 in Table 7b, by increasing an expected
distance over banking ATM deployments. That is, the increasing ATM deployments have substantially
positive effect on consumer utility. Such a property is slightly supported by variable on number of
competitor because it has significantly positive sign. The coefficient of interest rate of deposits shows
negative sign but the interaction term with the level of county income and the squared level of that is not
significant. The variable on large banks that is a percentage level for each Metropolitan Statistical Area
has impact to customers positively as a positive marginal utility that is supported to variable on branch in
Table 9a.
Table 8a and 8b show the results of consumer demographics using micro data. To match a
constructed banking ATM data, I choose that respondents are primary used in Commercial banks for cash
withdrawal services from the 2008 and 2009 Survey of Consumer Payment Choice. This is because in this
paper the consumer choice to ATM use represents competition in deposit banking ATMs. The estimated
parameter on surcharge has also a negative sign: the magnitude of parameter of surcharge in logit model
38
is much negatively higher in IV logit model. The interaction terms on surcharge give more a precise
estimation when combined with consumer’s cash withdrawal preference such as its frequency and cash-
amount per ATM transaction. These are significantly negative signs in both models, e.g. -0.179 and -
0.223 to variable on cash-amount, and -0.343 and -0.436 to variable on cash frequency in Table 8a and 8b,
respectively. This implies the negative impact on consumer’s utilities by surcharging can be very
persuasive when the model adds to consumer demographics including cash withdrawal preferences. The
remaining interactions on ATM surcharge fee in Table 8a and 8b as follows: between surcharge costs and
the level of family income (+), between surcharge and the squared family income (-), between it and one
that education attainment is “college” (+), and between it and one that the racial group is “Black” (-).
The estimated parameter of foreign fee has positive sign, i.e. 0.119 in Table 8a but it has changed
significantly, i.e. 0.448 in Table 8b as using instruments on surcharge. The interacted coefficient of
foreign fee on the level of income level indicates that the marginal utility of foreign fee increase is
declined to increase income level, i.e. -0.407, and increased to decreased the squared its level, i.e. 0.055.
This implies that the variable on foreign fee may indirectly capture the trade-off between ATM fees and
unaffiliated ATM use by convenience. This is because the variable on distance is significantly negative
and the impact of competitors within 2-mile is shown by a positive sign, e.g. 1.131 in Table 8b.
The variable of distance, , has a negative effect by interacting with customer’s demographics
over cash withdrawal preference. That is, the marginal disutility by increasing distance is declined from
increasing of cash amount and its frequency, for example, -0.084 in Table 8a and -0.194 in Table 8b, and
-0.379 in Table 8a and -0.489 in Table 8b, respectively. The coefficient of large banks is positively
significant, e.g. 1.915 in Table 8a and 1.838 in Table 8b, while that of small banks is substantially
negative, e.g. -2.635 in Table 8a and -1.782 in Table 8b. The interaction term on large banks shows
slightly negative sign on variable age in Table 8a. Interestingly, the interaction between small banks and
the variable on Reward of debit cards has significantly positive coefficients, e.g. 0.199 in Table 8a and
0.263 in Table 8b, which implies that the marginal disutility choosing small banks is more increasing on
the availability of the reward from usage of debit cards. Furthermore, it has positive sign on the
interaction terms of both cash amount and cash frequency.
7.3. Random Coefficient Logit

Table 9a represents the results for the random coefficients model without consumer demographics, with
that, and with that and micro data. Table 9a shows mean effects for random coefficients. Table 9b tests
the standard deviations for mean utilities capturing the effect of the unobserved consumer cash-
withdrawal preference. Table 9c and 9d represent mean coefficients and its standard deviation for
consumer demographics.
39
The coefficient with distance effect, , has negative mean coefficients in all cases. The
negative coefficients suggest that the average consumer gets a more utility from a less banking ATM
deployed and its coefficient with a negatively higher magnitude is shown in the model combined with
consumer demographics. These are -0.343 without consumer demographics, -0.780 with that, and -0.548
with that using micro data. When the standard deviations are estimates of random consumer heterogeneity,
a significant standard deviation of , e.g. 0.163 in the third column of Table 9b, make sure that the
mean coefficient of that is negative in that consumer has positive preferences at the nearest banking
ATMs.
The parameter of most important in this model is the estimated mean coefficient on price which is
individual surcharge costs. Given Assumption 8 on the independence of the distribution of unobserved
and observed consumer characteristics, the total price sensitivity is a combination of the mean effects and
the effects described by interaction with unobserved and observed characteristics. The mean effect on
price is -0.276 and -0.303 in second and third column in Table 9a, respectively. This represents that the
disutility obtained by the average consumers. The relatively small estimated standard deviation, e.g. 0.178
in the model with consumer demographics and 0.189 in that using consumer’s micro data, suggest that
most of the heterogeneity is explained by the model which is reflecting the consumer demographics.
Hence the inclusion of such an observed heterogeneity improves predictability for model.
In the estimated mean coefficients without consumer demographics with that, at first and second
column in Table 9a, the average elasticity to price has different price sensitivities, e.g. -0.430 and -0.589,
respectively. When taking consumer demographics using micro data to the model, one concludes that
many customers have more pricing sensitivities, e.g. -0.646 in third column in Table 9a. The relative
standard deviation from the unobserved consumer characteristics accounting into the model, illustrate that
consumer obtain negative utility from surcharging. This says that consumers with holding deposit
accounts to small banks with relatively small ATM networks may switch more their account to larger
banks under the model that interacting with cash withdrawal preferences for the average consumer on
product choices.
To capture the trade-offs between ATM fees and unaffiliated banking ATM use by convenience,
the variable on foreign fee is a good proxy and its mean coefficient is positive when modeling without
consumer demographics and with consumer demographics using micro data, e.g. 0.070 and 0.132 in first
and third column of Table 9a, respectively. This result implies that own customer with a cash withdrawal
preference reflected by the average consumer prefer foreign ATM use because of convenience. The
positive trade-offs between ATM fees and convenience is more involved in the model with consumer
demographics using micro data. It can be because the variable on the total number of competitors has
relatively large and a positive mean utility, i.e. 0.217 in third column of Table 9a. However the ATM
40
density to off-premise ATM has negative mean coefficient and relatively large standard deviations in all
cases of Table 9a. Because when customers use off-premise ATMs which is not deposit banking ATMs,
an average consumer is get more disutility by surcharging. The negative value signifies the disutility
obtained from occurrence of surcharging effect. But its relatively higher standard deviation than that for
Branch suggest that variable on ATM density of off-premise ATMs possibly offers consumer
convenience by locations, nevertheless a negative effect of ATM fees, e.g. surcharge and foreign fee,
exists.
The estimated coefficient of the total number of competitors shows a positive utility for the
average consumers. It is interesting to see that the increasing number of competitors affects the increasing
of own bank’s ATM within 10-mile area, because it is positive and statistically significant coefficient, i.e.
0.217 at the third column in Table 9a. It may be due to fact that customers are not really taking its
negative effect into consideration where they choose ATMs. The mean coefficient for large banks which
is a percentage level across MSA markets is a positive value with relatively small standard deviations.
The positive value signifies the high utility obtained from the large banks with relatively larger ATM
networks while the negative value on variable small banks suggests that the high disutility derived from
the small ATM networks. This is because the mean coefficients for variable large banks and small banks
are 2.238 and -1.955, respectively, in Table 9a. This means a consumer holding deposit accounts at large
banks get even more positive utility from patronizing ATMs over cash-withdrawals and it implies that the
coefficient on preference for large bank is proxy to bank quality which consumer perceived. The relative
small estimated standard deviations suggest that most of consumer heterogeneity to bank size, which is
consumer preference, is explained only by the observed demographics, e.g. 0.414 at first column and
0.232 at third column in Table 9b.
Table 9c and 9d show the estimated coefficients and standard deviations from interaction terms
with consumer demographics and its micro data, using random coefficient logit models. The positive
mean coefficient interacted between individual surcharge cost and income level of county illustrates that
the marginal disutility imposing a surcharge cost is increasing in income level and decreasing in a squared
income level, e.g. 0.221 and -0.046, respectively, in Table 9c and 0.282 and -0.070, respectively in Table
9d. These variables also have relatively small standard deviations. Variables on cash amount per ATM
transaction and cash frequency for mean coefficients and standard deviations are -0.197 and 0.017,
respectively, for cash amount and -0.370 and 0.041, respectively, for cash frequency. The most important
variable to explore the ATM network effect is an interacted term between cash frequency and surcharge,
because an increasing disutility obtained from ATM surcharge costs is decreasing in the increased number
of transaction for cash, i.e. cash frequency. This implies existence of positive network effects. The same
direction to reduce negative price effects is shown in variable White as racial group while the opposite
41
direction is illustrated in variable College as the level of education attainment. The positive utility from
variable on number of operating State of banks, e.g. its mean coefficient is 0.103, is strengthened by an
interacted term of White. Furthermore, the marginal disutility choosing small banks for customers is
increasing in the level of Debit Card Rewards, which has statistically significant coefficient and standard
deviation, i.e. 0.220 and 0.162, respectively, in Table 9d. That is, consumer prefers large banks with
relatively large ATM networks.
The demand estimates are useful in exploring the supply system in that the taste for consumer is
important to banking ATMs’ investment. Banks may strategically and geographically deploy their ATM
to attract the foreign customers. When the effect of the increased number of banking ATMs has a positive
sign on both demand and supply, for example, variable on number of banking ATMs and number of
operating State of banks, we say that banks have incentives to ATM investment by an ATM surcharge fee
increase. The estimated results for the marginal costs, which derived from equation (4.22), report in Table
10. Here, additional instruments are used to identify additional parameters, which are a rival employee per
branch, a rival branch number, a rival ATM number, and a rival banking salary per employee as described
in (6.8). The coefficients of logged formation for the number of employee per branch have a positive sign.
To more precisely specify, I add variable ATMcost in this supply system, which ATMcost is computed by
the sum of the interchange fee for debit card, ATM expenses, and telecommunication expenses that
normalized to total deposits. The coefficients for variable ATMcost and the number of banking ATMs is
significant and positive, e.g. 0.108 and 0.027, respectively, in model with consumer demographics and
0.126 and 0.026, respectively, in model using micro data. This implies that it costs more to deploy more
over the sample period 2008-2009.
To compute ATM expenses for ATM optimal choice, I account the costs of ATM deployment
depending on its types such as on-premise and off-premise. In the satisfaction for equation (4.31), the
revenue for banking ATMs, e.g. function of R(.), is specified by variable on cash-withdrawal frequency as
the estimated parameters for random coefficient model. The cost variable for ω requires then additional
instruments because it is a vector describes to the actual number of ATMs and its average monthly fees in
Table 3c. The instruments are interchange fee of credit cards and telecommunication expenses, which are
normalized to total deposits. Table 11 summarizes the results of the banking ATM optimal choice. The
estimated constant, , is different in ATM’s location, e.g. on-premise and off-premise. The estimated
expenses of on-premise banking ATM are $1788 per month with a 95% confidence interval from $1259
to $2318 while that of off-premise ATM are $2649 per month with a confidence interval from $2288 to
$3010. These expenses varies as adding one-ATM more for each market, and that average expenses go up
by $22, e.g. on-premise ATM, and $6, e.g. off-premise.
42
7.4. Consume Welfare

Consumer surplus can be measured by the revealed preferences of consumers from their observed choices.
To estimate welfare change in the sample period, the expected equivalent variation (EV) is used by
changing time periods from t to t-1, i.e. from 2009 to 2008. Consumer’s expected benefits can be obtained
from changing banking ATM characteristics over the time periods. I follow the methodology of Nevo
(2001), the change of consumer surplus will be,
(7.1)
where E[ ] and * +, the equivalent variation (EV) represents in the change of

consumer welfare by market structures, that is as follows,
E ∑ 2 .∑ ( )/ .∑ ( )/3 (7.2)
where ns is the simulated number of populations in the model, is the coefficient on individual
surcharge costs. Under the estimated random coefficients with consumer demographics using micro data,
I estimate the change of welfare for consumer who held a deposit account. Because the great majority of
banks to be able to increase the number of ATMs are large commercial banks in Table 2b this estimates
capture to utility change of consumer over changing to banking ATM characteristics. For example, an
average changing for consumer surplus over the sample period of 2008-2009 shows all positive signs in
all regions of Metropolitan Statistical Areas, which is 30.47% in Table 12. Figure 2 is visual distributions
of average changes for consumer welfare by MSA boundaries. Incremental consumer welfare due to
ATM fees, i.e. surcharge and foreign fee, is also shown by Table 12 and Figure 3. Additional computation
for welfare change provides results of how consumer would have been affected when ATM fees had
increased in given sample periods. Note that consumer has disutility to an income loss by surcharging and
foreign fee. However the effect for consumer welfare is not only driven by a price change but rather the
altered characteristics of banking ATMs which play in its estimates. In Table 12, ATM characteristics
change such as growing the number of ATM terminals by shrinking distance to ATM use for consumer
can offset the negative effect from rising ATM fees. That is the consumer utility and their surplus increase.
This is because the changed consumer welfare imposing ATM surcharge costs increase due to positive
network effects in results from interaction with increasing cash-withdrawal frequency for the average
consumer, e.g. 4.78 % by ATM surcharge fee and 1.55% by foreign fee. One of considerable reasons is
banks have strategy to deploy their ATMs more in order to avoid an account transfer to own customers.
43
8. Conclusion
In this paper, I explore the random coefficient logit model allowing for consumer demographics which
account micro data in the retail banking ATM industry. The study employs a banking ATM data that
consists of ATM surcharge fee, foreign fee, banking ATM characteristics, and distance to ATM
deployments in U.S. MSA markets. I address the issue of network effect that arises due to ATM surcharge
fee. Competition in the banking ATM industry is represented by the increased number of ATM terminals
and the shrinking distance by estimated coefficients may support increasing ATM fees of surcharge and
foreign fee. Further I estimate the change of consumer welfare over the positive growth of ATM
deployments and ATM fees.
Demand estimates correctly detect marginal disutility to ATM surcharge fee. The ATM surcharge
cost represents ATM network effects only if the model with the average consumer demographics, as
micro data, is interacted with distribution of cash frequency. That is an increasing disutility obtained from
surcharging offsets from the increased number of transactions for cash.
The issue that consumer prefers large banks with large ATM network has found from the variable
on distance of ATM deployments. The estimated results say that an increasing distance among bank
ATMs negatively affect ATM demand of consumer. Further this is supported by results of interaction
terms that the marginal utility choosing small banks is increasing on the level of rewards of Debit card
usage, cash-withdrawal amount, and its frequency. Another issue to explore the trade-offs between
unaffiliated ATM use and convenience is measured by variable on foreign fee, the results imply that the
positive trade-offs exist in interacted model with consumer demographics using micro data, that is related
to the average demographics with cash-withdrawal preferences.
Competition on banking ATM industry is captured by the results of estimated coefficient for total
number of competitors that lead to positive utility for the average consumer because relatively large
number of competitors makes customers getting more choice to ATM use. This is relevant to convenience
for consumer because the estimated coefficient on distance has a negative utility to ATM deployment
decrease. The average consumer has therefore a high preference to large banks.
The taste for consumer is important to ATM investment, which is explored by supply system.
Banks with a higher market share in the market have an incentive to deploy it more by setting higher
ATM fees. The cost to ATM deployment varies based on ATM location-type such as on-premise and off-
premise. The results show that ATM expenses per month differ by its location: the estimated average
ATM expenses for on-premise and off-premise are $1788 and $2649 per month, respectively.
The consumer welfare from the changing sample period from 2009 to 2008 is increased by 30.47%
because of the changing banking characteristics such as ATM deployments induced by ATM fees. The
44
ATM surcharging effect is important when it imposes the network effects and it then affects consumer
welfare. The percentage change of welfare provides how customers would have been affected to whether
there are ATM fees in given sample period. The results for the change of consumer welfare by ATM
surcharge fee and foreign fee are appeared to be upward and increased by 4.78% and 1.55%, respectively.
45
Table Lists
Table 6. Demand Estimation on OLS Logit and IV Logit Model
OLS Logit IV Logit OLS Logit IV Logit

Dependent Var. ( ) ( )a ( ) ( )
Term on Price
Deposit Service Fee b -0.096** -0.218** - -
(0.013) (0.025
Surcharge b - - -0.403** -1.111**
(0.071) (0.493)
Variable
Interest rate of Deposits -0.015 -0.086 -0.496** -0.580**
(0.079) (0.081) (0.079) (0.099)
Interest rate of Loans -0.244** -0.220** -0.293** -0.293**
(0.044) (0.045) (0.043) (0.043)
Branch c 5.671** 5.783** 0.960** 0.744**
(0.141) (0.144) (0.139) (0.204)
Num. of Employee per Branch 0.003** 0.002 0.013** 0.014**
(0.001) (0.001) (0.001) (0.001)
Num. of Operating State of Banks 0.022** 0.038** 0.177** 0.176**
(0.003) (0.004) (0.002) (0.002)
ATM Density of off-premise ATMs -0.611** -0.650** -0.864** -0.959**
(0.076) (0.077) (0.074) (0.099)
Large Banks (%) 0.176** 0.101 0.764** 0.919**
(0.062) (0.064) (0.223) (0.250)
Small Banks (%) -0.264** -0.337** -3.492** -3.372**
(0.078) (0.080) (0.450) (0.463)
d
-2.558** -2.613** -2.746** -3.533**
(0.559) (0.566) (0.554) (0.780)
Num. of Competitors within 2-mile -0.576 -0.483 0.031** 0.034**
(0.520) (0.526) (0.012) (0.012)
Num. of Competitors within 5-mile -0.050 -0.129 -0.002 -0.002
(0.446) (0.451) (0.008) (0.008)
Num. of Competitors within 10-mile 0.178 0.205 0.009 0.008
(0.276) (0.280) (0.007) (0.007)
Surcharge -0.029 -0.063 - -
(0.041) (0.042)
Foreign Fee 0.124** 0.131** 0.204** 0.348**
(0.023) (0.023) (0.047) (0.110)
Constant -7.684** -7.225** -9.039** -7.656**
(0.158) (0.178) (0.267) (0.990)
Ave. Elasticity -0.332 -0.756 -0.860 -2.369
R-squared 0.443 - 0.770 -
Num. of Obs. 3740 3740 3740 3740
Notes: Standard errors in parentheses
*
p < 0.10, ** p < 0.05
a
Outside option is market share of Credit Unions
b
Instruments of Deposit Service Fee is used by (6.8)
Instruments of Surcharge cost is used by (6.8)
c
Branch is computed by the number of branches at inside market (MSA market) / outside number of branches
d
Square root law is used to measure consumer’s travel distance, which calculated by equation (3.2) where N is the
number of shared ATMs of bank j and M is total market distances on per MSA derived by Euclidean distance of
equation (5.3) and K is a constant of proportionality which is the number of banks with holding shared ATM networks
46
Table 7a. Logit Model with Demographic Variables of MSAs ( )
Consumer characteristics ( ) : Interaction Term

Variable Coefficient HH Income a ( ) Bank Types b
(̅)
Term on Price
Surcharge -0.286** 0.216** -0.047** -0.021**
(0.038) (0.045) (0.017) (0.008)
Variable
Interest rate of Deposits -0.797** -0.153 0.082 0.184**
(0.290) (0.314) (0.091) (0.038)
Interest rate of Loans 0.209 0.153 -0.040 -0.108**
(0.159) (0.160) (0.045) (0.021)
Branch 0.178** - - -
(0.073)
Num. of Employee per Branch 0.002** - - -
(0.000)
Num. of Operating State of Banks 0.114** - - -
(0.001)
ATM Density of off-premise ATMs -0.243** - - -
(0.039)
Large Banks (%) 4.252** - - -
(0.063)
Small Banks (%) -3.372** - - -
(0.109)
c
-0.884** - - -
(0.293)
Num. of Competitors within 2-mile 0.011* - - -
(0.066)
Num. of Competitors within 5-mile -0.001 - - -
(0.004)
Num. of Competitors within 10-mile 0.007** - - -
(0.004)
Foreign Fee -0.252 0.214 -0.062 0.026
(0.189) (0.204) (0.059) (0.027)
Constant -10.110** -1.757** 0.398** 0.214**
(0.564) (0.587) (0.169) (0.082)
Ave. Elasticity -0.609
Notes: Dependent Variable: ( ) ( )
Standard errors in parentheses
*
p < 0.10, ** p < 0.05
a
Average logged-income level per each county($10,000)
b
A binary indication that equal one when the bank type is Commercial banks and zero otherwise
c
47
Table 7b. IV Logit Model with Demographic Variables of MSAs ( )
Consumer characteristics ( ) : Interaction Term

Variable Coefficient HH Income a ( ) Bank Types b
(̅)
Term on Price
Surcharge -1.731** 0.249** -0.060** -0.011
(0.622) (0.055) (0.020) (0.011)
Variable
Interest rate of Deposits -1.318** 0.194 0.002 0.195**
(0.409) (0.400) (0.113) (0.045)
Interest rate of Loans 0.274 0.090 -0.025 -0.107**
(0.190) (0.191) (0.053) (0.025)
Branch -0.249 - - -
(0.220)
Num. of Employee per Branch 0.003** - - -
(0.001)
Num. of Operating State of Banks 0.113** - - -
(0.002)
ATM Density of off-premise ATMs -0.429** - - -
(0.093)
Large Banks (%) 4.171** - - -
(0.082)
Small Banks (%) -3.455** - - -
(0.129)
c
-2.583** - - -
(0.808)
Num. of Competitors within 2-mile 0.017** - - -
(0.008)
Num. of Competitors within 5-mile 0.001 - - -
(0.005)
Num. of Competitors within 10-mile 0.006 - - -
(0.004)
Foreign Fee -0.094 0.089 -0.001 0.052
(0.233) (0.249) (0.075) (0.033)
Constant -6.668** -1.729** 0.347* 0.128
(1.621) (0.693) (0.200) (0.104)
*
p < 0.10, ** p < 0.05
A set of instruments for price is used by (6.8)
a
Average logged-income level per each county($10,000)
b
c
Square root law is used to measure consumer’s travel distance, which is calculated by equation (3.2) where N is the
48
Table 8a. Logit Model with Microdata ( )
Consumer Characteristics (micro data : ) : Interaction Term

Variable Coefficient Family Family Age Education Attainment c Race d Reward e Cash Cash
(̅) Income Income2 a HC SC C G W B A L Amount Freq.
Term on Price
Surcharge -0.304** 0.254** -0.063** -0.000 0.025* 0.010 0.104 -0.039 -0.058 -0.060* 0.035 -0.001 -0.010 -0.179** -0.343**
(0.038) (0.054) (0.017) (0.001) (0.014) (0.032) (0.080) (0.050) (0.047) (0.033) (0.030) (0.018) (0.021) (0.068) (0.154)
Variable
Interest rate of -1.610* 1.492** -0.312 -0.002 0.037 -0.127 0.399 -0.133 -0.266 -0.012 -0.219 -0.006 - - -
Deposits (0.828) (0.802) (0.195) (0.004) (0.054) (0.117) (0.269) (0.168) (0.177) (0.119) (0.142) (0.062)
Branch 0.186* - - - - - - - - - - - - 0.069 -0.240
(0.100) (0.393) (1.307)
Num. of Employee 0.004* - - - -0.002* -0.000 -0.000 0.004 0.002 0.001 -0.001 -0.001 - - -
per Branch (0.002) (0.001) (0.001) (0.001) (0.004) (0.003) (0.002) (0.002) (0.001)
Num. of Operating 0.103** - - - 0.001 0.002 0.022 -0.015* 0.010 0.007 0.003 0.001 - - -
State of Banks (0.007) (0.002) (0.005) (0.014) (0.009) (0.007) (0.005) (0.004) (0.002)
ATM Density of -0.243** - - - - - - - - - - - - 0.229 0.340
off-premise ATMs (0.058) (0.294) (0.672)
Large Banks (%) 1.915** - - -0.005* -0.053 -0.032 -0.003 0.037 - - - - -0.049 0.132 0.261
(0.585) (0.003) (0.048) (0.106) (0.303) (0.187) (0.064) (0.211) (0.443)
Small Banks (%) -2.635** - - -0.001 0.064 0.165 0.080 0.026 - - - - 0.199** 0.426 1.447**
(0.878) (0.004) (0.060) (0.145) (0.349) (0.214) (0.098) (0.278) (0.717)
b
-0.687** - - - - - - - - - - - - -0.084* -0.379**
(0.308) (0.045) (0.147)
Num. of Comp. 0.777 - - - - - - - - - - - - - -
within 2-mile (0.508)
Num. of Comp. -0.305 - - - - - - - - - - - - - -
Num. of Comp. 0.304 - - - - - - - - - - - - - -
Foreign Fee -0.089** - - - - - - - - - - - - 0.383 **
0.176
(0.015) (0.173) (0.370)
Constant -8.474** -2.559** 0.570** 0.003 -0.079 0.034 -0.826* 0.336 0.393 0.226 0.016 0.077 0.042 -0.224 0.698
(0.922) (0.919) (0.229) (0.005) (0.082) (0.175) (0.462) (0.288) (0.256) (0.160) (0.195) (0.098) (0.091) (0.425) (0.853)
*
p < 0.10, ** p < 0.05
a
Squared family income level
b
Square root law is used to measure consumer’s travel distance, which is calculated by equation (3.2).
c
HC: High School, SC: Some College, C: College, and G: Graduate Studies
d
W: White, B: Black, A: Asian, and L: Latino
e
Debit card reward status: Yes (1) or No(0)
49
Table 8b. IV Logit Model with Microdata ( )
Consumer Characteristics (micro data : ) : Interaction Term

Variable Coefficient Family Family Age Education Attainment c Race d Reward e Cash Cash
(̅) Income Income2 a HC SC C G W B A L Amount Freq.
Term on Price
Surcharge -2.003** 0.301** -0.076** 0.001 0.018 0.011 0.155* -0.077 -0.081 -0.067* 0.047* -0.026 0.007 -0.223** -0.436**
(0.705) (0.064) (0.021) (0.001) (0.017) (0.039) (0.091) (0.059) (0.053) (0.040) (0.028) (0.034) (0.026) (0.084) (0.202)
Variable
Interest rate of -2.142* 1.885* -0.410* 0.001 0.010 -0.257* 0.860** -0.466* -0.313 0.077 -0.293* -0.071 - - -
Deposits (1.061) (1.016) (0.243) (0.005) (0.068) (0.151) (0.391) (0.256) (0.196) (0.136) (0.141) (0.101)
Branch -0.263 - - - - - - - - - - - - 0.016 -2.371
(0.236) (0.454) (1.927)
Num. of Employee 0.005** - - - -0.002** -0.001 -0.012 0.006 0.001 -0.001 0.001 -0.001 - - -
per Branch (0.002) (0.001) (0.001) (0.007) (0.005) (0.002) (0.002) (0.001) (0.001)
Num. of Operating 0.101** - - - 0.002 0.002 0.046* -0.029** 0.009 0.003 0.001 0.003 - - -
State of Banks (0.008) (0.002) (0.006) (0.018) (0.011) (0.008) (0.005) (0.003) (0.003)
ATM Density of -0.436** - - - - - - - - - - - - 0.237 -0.118
off-premise ATMs (0.107) (0.311) (0.902)
Large Banks (%) 1.838** - - -0.006 -0.058 -0.089 -0.295 0.233 - - - - 0.004 0.233 0.285
(0.705) (0.004) (0.063) (0.134) (0.421) (0.263) (0.078) (0.263) (0.586)
Small Banks (%) -1.782 - - -0.005 0.091 0.186 0.103 0.077 - - - - 0.263** 0.758** 1.613
(1.148) (0.006) (0.074) (0.183) (0.394) (0.243) (0.118) (0.333) (1.133)
b
-2.545** - - - - - - - - - - - - -0.194** -0.489**
(0.858) (0.095) (0.215)
Num. of Comp. 1.131** - - - - - - - - - - - - - -
Num. of Comp. -0.091 - - - - - - - - - - - - - -
Num. of Comp. 0.169 - - - - - - - - - - - - - -
Foreign Fee 0.295* - - - - - - - - - - - - 0.147 -0.288
(0.164) (0.226) (0.538)
Constant -7.663** -3.124** 0.714** -0.004 -0.054 0.166 -1.319** 0.677* 0.509* 0.213 -0.001 0.208 -0.088 0.341 2.433**
(1.995) (1.153) (0.287) (0.007) (0.101) (0.227) (0.576) (0.360) (0.302) (0.188) (0.188) (0.169) (0.123) (0.592) (01.239)
*
p < 0.10, ** p < 0.05
a
b
Square root law is used to measure consumer’s travel distance, which is calculated by equation (3.2).
c
HC: High School, SC: Some College, C: College, and G: Graduate Studies
d
W: White, B: Black, A: Asian, and L: Latino
e
Debit card reward status: Yes (1) or No(0)
50
Table 9a. Estimated Parameters for Banking ATMs’ Demand
Random Coefficients
Coefficients without with with
Consumer Consumer Consumer
Demographics Demographics a Demographics
& Micro Data b
Term on Price
Surcharge -0.202** -0.276** -0.303**
(0.039) (0.038) (0.037)
Mean Parameters
Interest rate of Deposits -0.254** -0.963** -1.900*
(0.059) (0.402) (0.818)
Interest rate of Loans 0.029 0.256* -
(0.050) (0.253)
Branch 0.281** 0.192** 0.245**
(0.074) (0.072) (0.086)
Num. of Employee per Branch 0.005** 0.002** 0.004**
(0.001) (0.001) (0.001)
Num. of Operating State of Banks 0.116** 0.109** 0.103**
(0.001) (0.001) (0.004)
ATM Density of off-premise ATMs -0.280** -0.250** -0.216**
(0.040) (0.038) (0.039)
Large Banks (%) 4.339** 4.358** 2.238**
(0.074) (0.071) (0.044)
Small Banks (%) -3.598** -3.607** -1.955**
(0.094) (0.124) (0.079)
c
-0.343** -0.780** -0.548**
(0.262) (0.264) (0.256)
Num. of Competitors within 2-mile 0.017** - -
(0.006)
Num. of Competitors within 5-mile -0.003 - -
(0.004)
(0.004)
Total Num. of Competitors d - 0.007** 0.217**
(0.002) (0.076)
Foreign Fee 0.070** -0.166 0.132*
(0.024) (0.239) (0.118)
Constant -14.170** -13.351** -11.687**
(0.172) (0.914) (0.691)
Ave. Elasticity -0.430 -0.589 -0.646
Num. of Obs. 3740 3740 3740
*
Indicate t-statistic >1, ** Indicate t-statistic > 2
a
using the results of Table 7
b
c
d
The total number of competitors’ ATMs within 10-mile
51
Table 9b. Standard Deviations of Estimated Parameters for Banking ATMs’ Demand
Random Coefficients
Std. Deviations without with with
Consumer Consumer Consumer
Demographics Demographics a Demographics
& Micro Data b
Surcharge 0.200** 0.178** 0.189**
(0.050) (0.049) (0.049)
Interest rate of Deposits 0.617** 0.509** 0.492**
(0.063) (0.057) (0.057)
Interest rate of Loans 0.023* 0.027** -
(0.015) 0.006
Num. of Branch 0.334** 0.300** 0.335**
(0.142) (0.147) (0.142)
Num. of Employee per Branch 0.002** 0.001** 0.002**
(0.000) (0.000) (0.000)
Num. of Operating State of Banks 0.008** 0.009** 0.011**
(0.002) (0.001) (0.001)
ATM Density of off-premise ATMs 0.492** 0.467** 0.490**
(0.058) (0.056) (0.056)
Large Banks (%) 0.414** 0.438** 0.232**
(0.066) (0.060) (0.029)
Small Banks (%) 0.649** 0.645** 0.335**
(0.104) (0.098) (0.048)
c
0.143* 0.171 0.163*
(0.081) (0.287) (0.161)
Num. of Competitors within 2-mile 0.009* - -
(0.006)
Num. of Competitors within 5-mile 0.001 - -
(0.003)
(0.0002)
Total Num. of Competitors d - 0.001* 0.124*
(0.001) (0.122)
Foreign Fee 0.034* 0.052* 0.048*
(0.029) (0.025) (0.026)
*
a
b
c
d
The total number of competitors’ ATMs within 10-mile
52
Table 9c. Estimated Parameters of Consumer Demographics for Banking ATMs’ Demand
Consumer Demographics: Interaction Terms

HH Income a ( ) Bank Types b
Variables Coefficients Std. Deviations Coefficients Std. Deviations Coefficients Std. Deviations
Surcharge 0.221** 0.014** -0.046** 0.004** -0.024** 0.017**
(0.048) (0.004) (0.017) (0.001) (0.010) (0.003)
Interest rate 0.050 0.150** 0.029 0.049** 0.184** 0.094**
of Deposits (0.414) (0.018) (0.112) (0.006) (0.042) (0.014)
Interest rate 0.111 0.017** -0.029 0.005** -0.114** 0.028**
of Loans (0.236) (0.009) (0.057) (0.02) (0.023) (0.004)
Foreign Fee 0.092 0.027** -0.024 0.009** 0.013 0.041**
(0.253) (0.008) (0.068) (0.003) (0.027) (0.009)
Constant -1.632* 0.060** 0.342* 0.016** 0.265** 0.085**
(0.891) (0.024) (0.228) (0.007) (0.084) (0.015)
Notes: for results of second column of Table 9a and Table 9b
*
a
Average income level per each county($10,000)
b
53
Table 9d. Estimated Parameters of Consumer Demographics & Micro data for Banking ATMs’ Demand
Consumer Demographics of Micro Data: Interaction Terms

Family Family Age Education Attainment c Race d Reward e
Cash Cash
Variable Income Income2 a HC SC C G W B A Amount Freq.
Surcharge Coefficients 0.282** -0.070** - 0.019** - 0.067** - -0.069* -0.071* 0.037* - -0.195** -0.370**
(0.042) (0.014) (0.008) (0.031) (0.040) (0.030) (0.018) (0.041) (0.117)
S.D. 0.012** 0.004** 0.001 0.003** 0.013** 0.001 0.002 0.017** 0.041**
(0.003) (0.001) 0.001 (0.001) (0.006) 0.002 0.009 (0.004) (0.012)
Interest rate of Coefficients 1.742** -0.379* - - -0.076* 0.305** - -0.273** -0.194** - - - -
Deposits (0.803) (0.195) (0.039) (0.119) (0.119) (0.083)
S.D. 0.152** 0.041** 0.064 0.139* 0.207** 0.052*
(0.021) (0.008) (0.101) (0.076) (0.048) (0.035)
Num. of Operating Coefficients - - - - - 0.019** -0.014** 0.011** 0.006** - - - -
State of Banks (0.009) (0.006) (0.004) (0.003)
S.D. 0.001 0.001 0.008** 0.001**
(0.002) 0.002 (0.002) (0.000)
Large Banks (%) Coefficients - - -0.003** -0.098** - - - - - - - - -
(0.001) (0.034)
S.D. 0.005** 0.033
(0.001) (0.044)
Small Banks (%) Coefficients - - - 0.041 0.078 - - - - - 0.220** 0.515** 1.994**
(0.054) (0.117) (0.085) (0.242) (0.805)
S.D. 0.062 0.576** 0.162** 0.379** 1.417**
0.066 (0.101) (0.077) (0.176) (0.567)
b
Coefficients - - - - - - - - - - - -0.078* -0.483**
(0.055) (0.133)
S.D. 0.010 0.047*
(0.044) (0.045)
Foreign Fee Coefficients -0.309** 0.034* - - - - - - - - - 0.431**
(0.176) (0.019) (0.108)
S.D. 0.032* 0.019* 0.043**
(0.009) (0.018) (0.011)
Constant Coefficients -2.154** 0.523** - - - -0.770** 0.176** 0.397* 0.225* - - - 1.530**
(0.735) (0.179) (0.216) (0.087) (0.208) (0.120) (0.499)
S.D. 0.035* 0.007* 0.089* 0.078* 0.005** 0.005* 0.232*
(0.026) (0.006) (0.085) (0.041) (0.002) (0.003) (0.172)
Notes: for results of third column of Table 9a and Table 9b
*
Indicate t-statistic >1, ** Indicate t-statistic > 2,
a
b
Square root law is used to measure consumer’s travel distance, which is calculated by equation (3.2)
c
HC: High School, SC: Some College, C: College, and G: Graduate Studies, d W: White, B: Black, A: Asian, and L: Latino, e Debit card reward status: Yes (1) or No(0)
54
Table 10. Parameter Estimates for (log of) Marginal Costs
With Consumer Demographics a With Consumer Demographics

& Micro Data b
Variables Coefficients Std. Deviations Coefficients Std. Deviations
Log(Num. of Employee per Branch) 0.026** 0.005 0.024** 0.005
Log(Num. of Operating State of Banks) -0.002 0.003 -0.002 0.003
ATMcost c 0.108** 0.015 0.125** 0.015
Num. of Banking ATMs d 0.027** 0.002 0.026** 0.003
Constant 1.939** 0.054 1.961** 0.052
*
a
Marginal costs in second column of Table 9a
b
Marginal costs in third column of Table 9a
c
The variable of ATMcost represents sum of interchange fee of debit card, ATM expenses, and telecommunication expenses that
are normalized to total deposits. Instruments of ATMcost: rival employee per branch, rival total number branch and ATM, rival
salary per employee, and rival interchange fee of credit cards
d
Indicate the total number of ATMs divided by 1000
Table 11. ATM Optimal Choice
Coefficient 95% Confidence Interval( ) ζ 95% Confidence Interval (ζ)

** **
On-premise Banking ATMs 1788.33 1259.02 2317.64 21.85 10.59 33.11
(270.06) (5.74)
**
Off-premise Banking ATMs 2648.93 2287.92 3009.94 6.48** 3.35 9.61
(184.19) 9.61 (1.60)
Notes: Coefficient represents ATM costs ($) per month
Robust standard error in parentheses
*
p < 0.10, ** p < 0.05
Instruments for ω : Interchange fee of credit cards and telecommunication expense, that are normalized to total
deposits.
Table 12. Average Change in Consumer Surplus*
Random Coefficients Region
All Northeast Central Midwest Southwest

District District District District
Avg. Change in Consumer Surplus (CS) (+)30.47% (+)31.32% (+)30.76% (+)30.68% (+)29.97%
b/w 2008 and 2009 (%) a (0.07) (0.08) (0.07) (0.07) (0.06)
Avg. Change in CS by MSA Boundaries (%) (+)4.78% (+)2.31% (+)4.46% (+)3.28% (+)5.84%
b
: (With Surcharge – Without Surcharge) (0.85) (0.02) (0.08) (0.08) (1.26)
Avg. Change in CS by MSA Boundaries (%) (+)1.55% (+)2.64% (+)1.71% (+)1.19% (+)1.12%
c
: (With Foreign Fee – Without Foreign Fee) (0.22) (0.01) (0.02) (0.02) (0.33)
*
Notes: using results of random coefficient with consumer demographics & micro data in Table 9a, 9b, and 9d
Standard deviation (%) in parentheses
a
describe in Figure 2
b
describe in Figure 3a
c
describe in Figure 3b
55
Figure 2. Average Changing Consumer Surplus by Metropolitan Statistical Boundaries
Notes: using the results of Table 12

Average changing in consumer surplus over the sample period 2008-2009
Figure 3. Average Changing Consumer Welfare by Metropolitan Statistical Boundaries
( 3a ) ( 3b )
Notes: MSA indicate the Core-Based Statistical Areas (CBSA), Metropolitan Statistical Areas are collectively referred to as the
defined number of Core-Based Statistical Areas.
Graph 3(a) represents the average change in consumer surplus, i.e. (With Surcharge – Without Surcharge), where the average
change in CS across MSAs is 2.79%
Graph 3(b) represents the average change in consumer surplus, i.e. (With Foreign Fee – Without Foreign Fee), where the
average change in CS across MSAs is 2.12%
Red line indicates the average change in CS of U.S.
56
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The Benefits of ATM (Automatic Teller Machines) Fees

in the Retail Banks’ ATM Industry: Competition and Welfare*

This version: Feb. 2012

3. Banking ATM Industry Overview

One Network Multiple Networks

Interchange fee Pay interchange Fee

Customer Bank B’s ATM

Table 1. Average Herfindahl-Hirschman index (HHI) for Banks and ATMs

Table 2a.Top 20 Banks over Total Deposits in 2008 and 2009

Year 2008 2009

2007 2008 2009

1 BANK OF 18,753 14.4 BANK OF 9516 16.65 BANK OF 11098 16.83

Total Banking 127,867 57,140b 65,930b

Table 3d. Average Monthly Transactions for On-and Off-Premise ATMs

4.1. Consumer Behavior

4.1.1. Demand Equations

4.1.2. Logit Model on Banking ATM Demand

Cross-price and own-price elasticities of demand can be computed by following,

4.1.3. Demand Model with Interaction Term of Observed Consumer’s Characteristics

where ∑ ̅ . To specify the demand model, consumers are identified by * +,

estimators of parameter vector ( ) from consumer demographics without assumptions about

4.1.4. Random Coefficient Logit model with Consumer Heterogeneity

(Assumption 7) ( ) has a standard multivariate normal distribution.

where jmt pjmt xjmt djmt jmt

exp( jmt ijmt )

4.1.5. Marginal Costs

The first order condition with vector notation of (4.19) becomes,

The marginal cost of bank j is rewritten as follows,

The cost function, taking log-formation, becomes,

where is a constant coefficient to be estimated, is an unobservable vector of cost differences, and

4.2. Bank Behavior of Banking ATMs’ Choice

where represent profits for retail banking deposit/loan service, i.e. ∑ (

where Β is the set of banking ATMs.

where R. Β / E 0R . Β /1 . The necessary condition for profit maximization is that

E 0R( ) R( ) Β 1≤ ωζ ≤ E 0R( ) R( ) Β 1 (4.31)

Table 4a. Basic Statistics for Banking ATM Characteristics

Variable Average Standard Deviation Minimum Maximum

5.1. Banking ATMs and Consumer Characteristics

ATM Density of off-premise ATMs

Variable Average Standard Deviation Minimum Maximum

where r is the mean radius of the Earth (3,958.761 miles).

Micro Data of Consumer Demographics:

Table 4c. Basic Statistics for Consumer Demographics of Micro-data

Variable Average Standard Deviation Minimum Maximum

Variable Average Standard Deviation Minimum Maximum

Variable Average Standard Deviation Minimum Maximum

Table 5. Basic Statistics for Instruments

Variable Average Standard Deviation Minimum Maximum

6.1. The Minimization Routine for GMM

Given parameter ( ) where is in the population of interest to draw ns simulations, we write

be mean independent of between and , that is, E 0 | 1 E[ | ] E0 1

where and is instruments for demand-and supply-system. In equation (6.6), ( ) is

iterating until have reached a minimum.

6.2. Instruments for GMM

Table 5b. Testing for Weak Identification on ATM Surcharge Fee26

Variable Test Statistic Chi-square and/or P-value Null Hypothesis

7.1. Logit Model

7.2. Logit and IV Logit Model with Interaction Terms

7.3. Random Coefficient Logit

7.4. Consume Welfare

where E[ ] and * +, the equivalent variation (EV) represents in the change of

Table 6. Demand Estimation on OLS Logit and IV Logit Model

OLS Logit IV Logit OLS Logit IV Logit

Table 7a. Logit Model with Demographic Variables of MSAs ( )