Network Externalities

Bank 1 and Bank 2 are considering entering a compatibility agreement that would permit the users of each bank’s automated teller machines (ATMs) access to the other bank’s ATMs. Bank 1 has a network of branches and ATMs extending from the U.S. to Mexico. Bank 1’s 12 million customers currently have access to only the 10,000 ATMs owned by the company in the U.S. While Bank 2’s core account holders are located in Mexico and the southwestern portion of the United States, the company is expanding across the United States. Bank 2 has 15 million customers who can use any of its 14,000 ATMs.


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· Using the idea of network externalities, describe how such an agreement between Bank 1 and Bank 2 would benefit consumers. 

· What is the business rationale for such a strategy between Bank 1 and Bank 2?