I introduce a new series of posts, titled as above, just to keep you all on your toes. And by the way, I’ve long wondered if ATM surcharges aren’t taking advantage of a consumer intransitivity of indifference…you don’t mind losing the first fifty cents but…
We estimate a structural model of the market for automatic teller machines (ATMs) in order to evaluate the implications of regulating ATM surcharges on ATM entry and consumer and producer surplus. We estimate the model using data on firm and consumer locations, and identify the parameters of the model by exploiting a source of local quasi-experimental variation, that the state of Iowa banned ATM surcharges during our sample period while the state of Minnesota did not. We develop new econometric methods that allow us to estimate the parameters of equilibrium models without computing equilibria. Monte Carlo evidence shows that the estimator performs well. We find that a ban on ATM surcharges reduces ATM entry by about 12 percent, increases consumer welfare by about 35 percent and lowers producer profits by about 20 percent. Total welfare remains about the same under regimes that permit or prohibit ATM surcharges and is about 17 percent lower than the surplus maximizing level. This paper can help shed light on the theoretically ambiguous implications of free entry on consumer and producer welfare for differentiated products industries in general and ATMs in particular.
The core intuition is that a given ATM often has monopoly power ex post, once you are there and need the money. Lower fees mean fewer machines but that still might be better than facing the mark-up. Here is the paper, whack it down if you can.
Addendum: Don Boudreaux offers commentary and some whacks.
Well, let’s ban supranormal markups on chocolate bars, soft drinks, etc., all sold by variety stores, too. They all are sold under conditions of situational monopolies.
For repeat purchases, like candy, pop, and ATM usage, if one outlet rips me off in the situational monopoly, I don’t use them again unless it is to my benefit to use them. And sometimes it is — e.g. when I’d rather pay an extra 50 cents than walk or drive an additional block or two.
In other words, there is something fatally flawed in their measures of consumer surplus if those measures don’t include convenience and don’t make allowances for the value consumers receive from increased choice sets. I know some people (Bob Frank?) think that increasing consumer choice is a bad thing, but I like having more options to having fewer.
In our town we have options: we can use an ATM at a bank and pay nothing extra, or we can use an ATM at a convenience store and pay a bit extra. This seems ideal to me. We get the extra choice, but we don’t have to pay more if we’re willing to go to our bank.
“intransitivity of indifference”
What the heck does that mean???
The reason banks charge fees for the use of ATMs is that if you’re not our customer it simply isn’t free for us to give you money. If you want to be a total pedant, a bank that isn’t yours is actually extending you credit by letting you draw from one of its ATMs, they have to then draw those funds from your bank. IIRC it’s usually processed as an ACH transaction, and it doesn’t cost a ton to do but charging people fees for things is generally how banks stay in business.
Compensating differentials do seem very important; More convenient ATMs have higher surcharges, while the least convenient (the bank itself) has the lowest surcharge of zero. An interesting question is who benefits from the gov’t capping ATM fees? If poor people are more likely to avoid ATM fees entirely by going to their bank, capping the fees won’t help them at all.
I can tell you from personal experience that banning surcharges in a GREAT idea. I am from Canada but now live in Sweden, surcharges are rampant in Canada and there are none for cash withdrawal in Sweden (I think what happened was that in the 80s the state made it clear to the banks that they would legislate if the banks could not come up with a fee-free system).
Canada has the most ATMs per capita in the world, and the reason is because the banks and companies specialized in putting ATMs in bars are making their easiest money from surcharges. In Sweden there are ‘only’ a lot of ATMs (banks want their customers to use them and their customers want banks to provide them).
In Canada I would always find an ATM immediately but if I wanted to take my money out without a change I would have to find one of my own bank’s ATMs. In Sweden there are fewer ATMs but I can use any bank machine. The result is that there is very little difference when it comes to convenience and I do not pay 5+ % on my money every time I take out 20 bucks (those service fees really added up to a lot when I was a poor student even though I tried to avoid paying them). I am a much happy customer in the Swedish ATM market (and the banks seem to be ‘surviving’).
But wait, how could this be? If customers really would rather have fewer ATMs and no fees why hasn’t the banking market in Canada produced this result? I must be wrong, it must be the case that what I really want, i.e. what I would choose in a freer market (i.e. a non-Swedish market), is more ATMs and more fees. Or is it that banks have cartel ‘like’ tendencies and that once they see the kinds of profits they can make if they ALL charge these fees they have no reason to compete against each other on fees? Want to here another cool thing about ATM fees, evidence from Canada shows that introduction of fees resulted in movement from small banks to big banks because they have more ATMs and customers have a better chance of finding a no fee ATM with a big bank. Markets a just awesome ALL THE TIME!
I am not an economist and I know empirical evidence is not really that impressive in your circles. I have full confidence that someone out there will be able to develop a model showing me why I do not want what I think I want, but for now I am going to enjoy the blissful ignorance of spending a few ‘saved’ dollars on a Friday night beer.
Aaron, I don’t get the sarcasm. Note the heading of the post “anti-market paper of the month”.
I’m not saying this is necessarily the case, but one possibility is that the banks will make up for lost ATM fees with other kinds of fees.
I’m sure credit card companies also like ATM fees. I have good access to feeless ATMs, but in rare cases when I don’t, I’ll buy with a credit card rather than pay cash.
The whole point of being in business is to exercise some form of monopoly power so you can make greater than commodity profits.
Fee-less ATM’s subsidize small banks at the expense of large banks.
Personally I am sick of people trying to exploit sunk costs by businesses and trying to take a bite out of their incremental prices that they use to justify the initial up front investment. The opportunity cost that results from fewer new investments in areas covered by such anti-market behaviour may be invisible, but it is still very real, and in the long run hurts those who are supposedly being helped by these anti-market behaviours.
In my opinion this is the real reason why rust belt states are having a hard time right now while right to work states are doing just fine, or at least much better. It is because when choosing to build a new factory with a large immovable upfront fixed cost, it is foolhardy to locate that factory where you know that coercive unions and other antimarket forces will conspire to rip you off and turn an otherwise great investment into a loust return or a money losing proposition.
Varangy,
“You are conflating your preferences with the market en-masse.”
No I am not.
Rational self-interested agents do not want to pay more for the same service, i.e. rational agents choosing between the Canadian model and the Swedish model would choose the Swedish model. That is the point of my post. The only significant difference between the ATM service in Canada and Sweden is that in Sweden I do not pay surcharges.
Consumers prefer a market were cartel building is prohibited so that companies providing essential services cannot take out monopoly rents. Having your money in a bank is virtually unavoidable in a modern state while admittedly people do not need to use cash as much as they do. But given the continued importance of cash in modern economies I think it is safe to say that banks are exploiting the situation.
“‘I am not an economist’ You are right there.”
If you are an economist and you did not recognize the above points in my post you are in trouble
Ghost,
Of course the bigger the difference in access to ATMs between non-regulated and regulated ATM markets the greater the value of fee-based ATMs. But the point is that the difference is not that significant because I have access to all the bank’s ATMs and that the banks together do provide very good coverage in my regulated market. All I am noting is that the empirical facts do not support the claim that fee-based ATM service is driven by customer demand for coverage. I can of course be wrong about how I am interpreting the empirical facts, but I am not missing the fact that consumers have varying preferences for different levels of coverage.
For your next Anti-Market paper of the week, I suggest the one presented in this blog entry. http://www.thisplaceis.com/archives/26
U.C. Berkeley’s
Transportation
Seminar Series
September 8, 2006
4:00 to 5:00 p.m. in 240 Bechtel Hall
Donald Shoup, Ph.D.
Professor, Department of Urban Planning, UCLA
The High Cost of Free Parking
About 87 percent of all trips in the U.S. are made by personal motor vehicles, and drivers park free for 99 percent of these trips.
If drivers don’t pay for parking, who does? Everyone does, even if they don’t drive. …
Donald Shoup will explain how faulty data from the Institute of Transportation Engineers helped get us into this mess, and how we can get out of it.
As I recall, ATM service charges went up over the years — I never saw a $6 charge until rather recently — even as the cost of computers and networks dropped rapidly.
The commenters should next explain how the enormous Ticketmaster surcharges are another triumph of the free market.
In San Franciso the strip clubs have ATM machines at the front door – loaded with $1s. Now that is a situational monopoly.
Going back to credit cards v. cash. Do consumers have an irrational preference for cash? And aren’t ATM fees taking advantage of this? If you place an ATM in your own convenience store, bar, shop, etc I assume you also get some of the fee income. So in effect if someone comes in to buy something and goes to the ATM for cash, you are getting the profit on the sale and the ATM fee. Whereas if the buyer used a credit card you would get only the profit on the sale less the credit card rake (~1-2%).
aaron,
If you are not allowed to charge other bank’s customers for the privelege of using your ATM, then what is the incentive for investing the capital in creating a new ATM somewhere that is underserved by ATM’s?
What you are advocating is, now that savvy banks who foresaw the market for ATM’s for their customers have put up these ATM’s, that anyone else ought to be able to use them for free.
That was the point of my post at Sep 8, 2006 3:33:44 PM, which no one has seen fit to respond to, perhaps because I wrongly assumed that people would automatically assume that my first two paragraphs in this post were obvious and so I wrongly left them unstated. My bad.
You are advocating the theft via regulation of the would be profits of those who pay large fixed investments that can’t be “uninvested” or moved somewhere else that is not similarly ruled by thieves, a.k.a. opportunistic governments.
One definition of a democracy is two wolves and a lamb sitting down and voting on what is for dinner. The democracy of Sweden (and elsewhere) seems to me to be eating the seed corn of tomorrow by exploiting immovable capital that has already been invested and is now trapped. If Sweden is not careful it will find that there aren’t enough investments in job creating activities in Sweden for this reason. After adding in the hidden unemployed via various government “make work” and job training schemes Sweden has a monstrous unemployment rate which seems in part due to the reason I outlined above.
Rational self-interested agents do not want to pay more for the same service, i.e. rational agents choosing between the Canadian model and the Swedish model would choose the Swedish model. That is the point of my post. The only significant difference between the ATM service in Canada and Sweden is that in Sweden I do not pay surcharges.
You’re right, rational self-interested agents do not want to pay more for the same service — but the service here is not the same. The surcharge you are asked to pay is for the convenience of popping into the nearest bank not any bank — this is so obvious, I don’t why I would have to expain this to the, ostensibly, intelligent readers of this blog.
I, and my guess I am not alone in this, am willing to pay X dollars when I withdraw cash from the not-my-bank-ATM down the street from the bar I about to hop into, versus getting into my car (or taxi, if I have been drinking) and tracking down the nearest my-bank-ATM (transaction cost right there, if I am in an area I am not familiar with), driving to it (time and gas spent) — my costs for going to my back are easily more than the X dollars I pay at not-my-bank-ATM.
With regards to the bank’s ‘right’ to do so, well, that is a given, if you respect property rights etc etc — they paid for the network, they operate their ATM network, when a non-member uses it, they withdraw money that could have been withdrawn by one their customers, as well as physically use the ATM, a cost in time, if aggregated, is probably significant.
@Sailer,
I usually find your commentary to be quite cogent and enjoyable, but
As I recall, ATM service charges went up over the years — I never saw a $6 charge until rather recently — even as the cost of computers and networks dropped rapidly.
is hardly such. Hell, the cost of acquiring the next customer could have gone up, as could have the costs of maintaining digital security as well as a number of things. Who knows?
If the ATM fees are too high — don’t pay them.
If you think that the banks are being somehow unfair and ‘exploiting’ you, start your own bank and don’t charge ATM fees for non-members.
The commenters should next explain how the enormous Ticketmaster surcharges are another triumph of the free market.
As far as Ticketmaster goes, you are educated and intelligent and know that:
Middlemen are a third example of a market response to costly information. Much popular literature vilifies the role of the middleman. Press reports point out the huge difference between the prices received by farmers and the prices paid by customers, suggesting that evil middlemen are engaged in robbing farmers and consumers. But middlemen provide a vital function in ensuring that goods are delivered to where they are wanted. They are in the business of ensuring the efficient allocation of the economy’s scarce resources. For the most part competition in this sector is keen. The fact that so much is paid for these services reflects their value in allocating resources efficiently. The fact that there are often high profits simply reflects that some individuals are able to perform those services much better than others.
(http://www.econlib.org/library/Enc/Information.html)
Kind of ironic coming from Joe Stiglitz knowadays.
PNC bank now offering free atm use for all atm’s if you keep minimum balance of $2500. It is amazing what high interest rates and competition for deposts will do.
http://www.post-gazette.com/pg/06236/715869-68.stm
One advantage of being an old coot is that you remember stuff. I remember how much lower were the service charges as a percent of ticket prices on Clash tickets back before Ticketmaster bought its main competitior Ticketron in 1991, and acquired other local competitors. I also remember when the #1 band in America at the time, Pearl Jam, tried to get the Ticketmaster monopoly to reduce the service charges levied on Pearl Jam’s fans, and what Ticketmaster did to sabotage Pearl Jam’s tour, and why no major band has dared cross Ticketmaster since.
Businessmen become monopolists precisely so they can raise prices and make bigger profits. It’s Econ 101.
Here’s the Congressional testimony by two members of Pearl Jam that explains Ticketmaster’s behavior:
http://www.fivehorizons.com/archive/articles/testimon.shtml
It used to be said, how you felt about Rent Control was a pretty fair assesment about how well one understands economics, looks like in today’s world, how you feel about ATM fees provides similar insight.
In all this discussion it seems that no one understands the difference between ATM fees and ATM surcharges. A surcharge >is< one on top of the regular charge.
I have an account at bank A; I get some cash at bank B. The system (NYCE, Cirrus, et al) charges bank A a fee, part of which is used to pay bank B for its service. Bank A can charge me that fee (or more) if it wants to. Or, it can eat it as part of its attempt to make itself attractive to me as a customer.
Bank B can take the opportunity to add on a surcharge if it wants, but that’s extra: it has already recovered its costs and a small earnings.
This doesn’t really affect the argument of whether or not it should be allowed, but I thought it should be clarified.
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