Product innovation and network survival in the U.S. ATM and debit card network industry

Fumiko Hayashi and Zhu Wang

No RWP 08-14, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper studies product innovation and firm survival in the U.S. ATM/debit card industry. The industry started with a few shared ATM networks in the early 1970s. The number of networks grew quickly up until the mid 1980s, but then declined sharply. We construct a theoretical model based on Jovanovic and MacDonald (1994). In contrast to their model focusing on cost-saving technological innovation, our model shows a major product innovation may also trigger the shakeout. The theoretical predictions are tested using a novel dataset on network entry, exit, size, location, ownership and product choices. The findings suggest introducing the point of sale debit function in the mid 1980s played an important role driving the network consolidation. Unlike previous studies, we find little advantage of being early industry entrants. Rather, due to network effects in the industry, large networks had better chance to adopt the product innovation and survive the shakeout. ; Original title: Product innovation and firm survival in a network industry ; Also issued as a Payments System Research Working Paper

Pages: 33 pages
Date: 2008-12-01
New Economics Papers: this item is included in nep-bec, nep-com, nep-cse, nep-ent, nep-ino, nep-mic, nep-net, nep-soc and nep-tid
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Citations: View citations in EconPapers (2)

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