Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 15

Bank 1 and Bank 2 are considering entering a compatibility agreement that would permit the users of each bank's ATMs access to the other bank's ATMs. Bank 1 has a network of branches and automated teller machines (ATMs) extending from Connecticut to Florida. Bank i's 12 million customers currently have access only to the 10,000 ATMs solely owned by the company on the East Coast. While Bank 2's core account holders are located on the West Coast and southwestern portion of the United States, the company is expanding to the East Coast. Bank 2 has 15 million customers who can use any of its 14,000 ATMs. Using the idea of network externalities, describe how such an agreement between Bank 1 and Bank 2 would benefit consumers.