MEASURING EXTERNALITIES AND ITS EFFECT ON INTER BANK PAYMENT NETWORKS

Network externality has been defined as a change in the benefit, or surplus, that an agent derives froma good when the number of other agents consuming the same kind of good changes. In principle, thevalue received by consumers to be separated into two distinct parts. One component, which in ourwritings we have labeled the autarky value, is the value generated by the product even if there are noother users. The second component, which we have called synchronization value, is the additionalvalue derived from being able to interact with other users of the product, and this latter value is thenetwork externalities effects. Network externalities in the positive perspective mean that utility, whichusers derive from consumption of a given good or service, increases with the number of other users.The most obvious reason for a positive dependence is that a larger network allows consumers tosatisfy more communication needs. In first model we concluded if the quantity of labour and capitaldecreases, the level of investment in the network increases. Moreover in this study, we investigate thevalue of an electronic inter-bank payment network in terms of its effect on the reserve managementperformance of commercial banks by using another model. Performance is measured by the opportunity and penalty costs generated by balances on the reserve account. We propose that the electronic inter-bank payment network enhances banks’ reserve management performance (i.e., reducing opportunity and penalty costs) by providing more timely information on deposits and withdrawals affecting the banks’ reserve accounts. Technology impact is characterized as an initial stand-alone effect and a network externalities effect as more banks join the network.

Keywords:

network externalities , measurement , model , inter bank payment