Innovation, Deregulation, and the Life Cycle of a Financial Service Industry

This paper examines innovation, deregulation, and firm dynamics over the life cycle of theU.S. ATM and debit card industry. In doing so, we construct a dynamic equilibrium model tostudy how a major product innovation (introducing the new debit card function) interactedwith banking deregulation drove the industry shakeout. Calibrating the model to a noveldataset on ATM network entry, exit, size, and product offerings shows that our theory fits thequantitative pattern of the industry well. The model also allows us to conduct counterfactualanalyses to evaluate the respective roles that innovation and deregulation played in theindustry evolution.