The Economics of Vertical
Restraints by Multisided
Platforms
David S. Evans
GlobalEcon, University of Chicago, and Univers...
Why Focus on Multisided Platforms?

New	
  and	
  rapidly	
  growing	
  economic	
  literature	
  with	
  important	
  an4...
Overview

Economics	
  of	
  Mul4sided	
  Pla>orms	
  

Cri4cal	
  Mass	
  and	
  Ver4cal	
  Restraints	
  

Pla>orm	
  Go...
Section 1

ECONOMICS OF MULTI-SIDED
PLATFORMS
OpenTable Is Intermediary between Diners and
Restaurants

© Global Economics Group. Do Not Distribute Without Permission

...
Restaurants Pay and Consumers Use Free

$119	
  million	
  NA	
  revenue	
  in	
  2011	
  |	
  	
  $1.02	
  billion	
  mar...
OpenTable Solves Transaction Cost Problem

$119	
  million	
  NA	
  revenue	
  in	
  2011	
  |	
  	
  $1.02	
  billion	
  ...
Positive Feedback Effects Fuel Growth

Ø  27	
  million	
  reserva4ons	
  in	
  
2011Q4	
  a	
  month	
  up	
  from	
  
1...
Many Similar “Multi-sided Platform” Businesses
Positive
COMPANY	
  

Feedback Effects Fuel Business Growth
CUSTOMER	
  SID...
Multi-sided Platforms Create Value by Reducing
Transaction Costs

Pla>orms	
  
enable	
  two	
  
or	
  more	
  
types	
  o...
Common Platform Features

PosiIve	
  
Indirect	
  
Network	
  
Effects	
  

Type	
  A	
  customers	
  value	
  pla>orm	
  m...
Impact on Economic Models

General	
  Result	
  

Most	
  economic	
  models/tools	
  used	
  in	
  an4trust	
  ignore	
  ...
Section 2

CRITICAL MASS AND VERTICAL
RESTRAINTS
YouTube Ignited in Late 2005
TABLE 1 -- YOUTUBE UNIQUE VISITORS ('000)
70,000.000

Both	
  sides	
  essenIal	
  for	
  lau...
Platforms Need Critical Mass to Ignite

CriIcal	
  mass	
  
Cri4cal	
  mass	
  refers	
  to	
  the	
  minimal	
  set	
  of...
Successful Platform Launch Depends on Critical
Mass

CriIcal	
  mass	
  corresponds	
  to	
  a	
  combinaIon	
  of	
  scal...
Critical Mass, Platform Ignition and Growth

Catalytic Ignition and Critical Mass

Side	
  A	
  

Ignition

D*- Long-run e...
Three Phases of Platform Growth

IniIaIon	
  

TABLE 1 -- YOUTUBE UNIQUE VISITORS ('000)

Pla>orm	
  undertakes	
  strateg...
Initiation and Getting to Critical Mass

Early	
  
adopters	
  

Customers	
  who	
  like	
  to	
  try	
  new	
  things	
 ...
Making It Harder for Rivals to Reach Critical
Mass
Lock	
  enough	
  
demand	
  on	
  
either	
  side	
  

By	
  keeping	
...
Vertical Restraints that Might Deter Entry

Exclusive	
  
Deals	
  

Locks	
  up	
  demand	
  on	
  one	
  or	
  both	
  s...
Some Procompetitive Explanations of Vertical
Restraints

Exclusivity	
  
benefits	
  
customers	
  

Customers	
  on	
  sid...
Balancing and Some Complexities

Degree	
  of	
  
impediment	
  to	
  
entry	
  

Impediment	
  depends	
  on	
  the	
  “t...
Section 3

PLATFORM GOVERNANCE AND VERTICAL
RESTRAINTS
Platforms Harness Externalities

A	
  Place	
  to	
  
Get	
  Together	
  

Pla>orm	
  provides	
  a	
  physical	
  or	
  v...
Platforms Helping One Side

Kanyon	
  Mall	
  in	
  Turkey	
  “is	
  appropriately	
  
named	
  in	
  light	
  of	
  the	
...
Platform Design and Rules Promote Positive
Externalities

SorIng	
  Devices	
  
to	
  Get	
  Right	
  
Customers	
  

“Exc...
Platforms and Bad Behavior
SAC	
  Insider	
  Case	
  Rides	
  Finra	
  
Referral	
  to	
  Cohen’s	
  Backyard	
  

© Globa...
Governance of Bad Behavior that Mitigates
Negative Externalities

Rules	
  

Prohibi4ons	
  on	
  ac4ons	
  that	
  could	...
Welfare Effects of Rules

PromoIng	
  
posiIve	
  
externaliIes	
  
has	
  costs	
  

Sor4ng	
  devices	
  harm	
  custome...
Vertical Restraints and Platform Governance

AnI-­‐steering/
exclusive	
  
dealing	
  rules	
  

Might	
  deter	
  entry,	...
Section 4

ANTITRUST ANALYSIS OF VERTICAL
RESTRAINTS
Factors to Consider in Evaluating Vertical
Restraints for Platforms
Impact	
  of	
  
restraints	
  on	
  
achieving	
  cri...
Thank You!

DAVID	
  S.	
  EVANS	
  
Global	
  Economics	
  Group	
  |	
  Chairman	
  
david.evans@globaleconomicsgroup.co...
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Evans on Antitrust Economics of Vertical Restraints for Multisided Platforms from December 2012

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Presentation examines antitrust economics of vertical restraints including tying, exclusive contracts, bundling, MFNs, the role of critical mass and platform ignition, possible anticompetitive strategies, and procompetitive explanations for vertical restraints.

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Evans on Antitrust Economics of Vertical Restraints for Multisided Platforms from December 2012

  1. 1. The Economics of Vertical Restraints by Multisided Platforms David S. Evans GlobalEcon, University of Chicago, and University College London 6 December 2012 Vertical Restraints Adopted by Dominant Firms CEDES, Brasilia, Brazil
  2. 2. Why Focus on Multisided Platforms? New  and  rapidly  growing  economic  literature  with  important  an4trust  applica4ons   Many  important  industries  including  exchanges,  media,  cards,  and  key  online   businesses   Many  compe44on  policy  cases  such  as  shopping  malls,  media  players,  payment  cards   and  search  engines   © Global Economics Group. Do Not Distribute Without Permission
  3. 3. Overview Economics  of  Mul4sided  Pla>orms   Cri4cal  Mass  and  Ver4cal  Restraints   Pla>orm  Governance  and  Ver4cal  Restraints   An4trust  Analysis  of  Ver4cal  Restraints   © Global Economics Group. Do Not Distribute Without Permission
  4. 4. Section 1 ECONOMICS OF MULTI-SIDED PLATFORMS
  5. 5. OpenTable Is Intermediary between Diners and Restaurants © Global Economics Group. Do Not Distribute Without Permission 5
  6. 6. Restaurants Pay and Consumers Use Free $119  million  NA  revenue  in  2011  |    $1.02  billion  markets  cap   © Global Economics Group. Do Not Distribute Without Permission 6
  7. 7. OpenTable Solves Transaction Cost Problem $119  million  NA  revenue  in  2011  |    $1.02  billion  markets  cap   © Global Economics Group. Do Not Distribute Without Permission 7
  8. 8. Positive Feedback Effects Fuel Growth Ø  27  million  reserva4ons  in   2011Q4  a  month  up  from   19  million  in  2010Q4   Ø  25k  restaurants  in   2011Q4  up  from  20k  in   2010Q4   Ø  More  than  40%  annual   growth  in  revenue   © Global Economics Group. Do Not Distribute Without Permission 8
  9. 9. Many Similar “Multi-sided Platform” Businesses Positive COMPANY   Feedback Effects Fuel Business Growth CUSTOMER  SIDE  A   CUSTOMER  SIDE  B   CUSTOMER  SIDE  C   Apple  iOS   Users   Applica4on   Developers   MNOs   Google  Search   Searchers   Adver4sers   Websites   Deutsche  Bourse   Liquidity  providers   Liquidity  takers   eHarmony   Men   Women   Época   Readers   Adver4sers   Aricanduva   Retail  Stores   Shoppers   American  Express   Cardholders   Merchants   Facebook   Friends   Adver4sers   © Global Economics Group. Do Not Distribute Without Permission Applica4on   Developers   9
  10. 10. Multi-sided Platforms Create Value by Reducing Transaction Costs Pla>orms   enable  two   or  more   types  of   customers,     who  could   engage  in   mutually   valuable   exchange   © Global Economics Group. Do Not Distribute Without Permission  to  find   each  other   though   search  and   matching    to   transact,   and  to   thereby   create  and   exchange   value.   10
  11. 11. Common Platform Features PosiIve   Indirect   Network   Effects   Type  A  customers  value  pla>orm  more  if  there  are  more  Type  B  customers   and  oen  vice  versa.   Money/ Subsidy  Side   Pla>orms  oen  give  one  side  a  “break”  and  make  their  profits  for  the  other   side.   Stores  like  malls  with  more  foot  traffic;  shoppers  like  malls  with  more   diverse  stores.   Consumers  don’t  pay  to  make  reserva4ons  and  even  get  reward  points  on   reserva4on  pla>orms.   Single/MulI-­‐ homing     If  customers  on  side  A  only  use    pla>orm  1  (“single  home”)  then  the   customers  on  side  B  can  only  reach  these  customers  through  the  pla>orm  1   (so  pla>orm  is  a  “compe44ve  boeleneck”).   Soware  developers  can  only  “reach”  iPhone  users  by  developing  by  the   iOS   © Global Economics Group. Do Not Distribute Without Permission 11
  12. 12. Impact on Economic Models General  Result   Most  economic  models/tools  used  in  an4trust  ignore  interdependent   demands  from  mul4ple  pla>orm  sides  and  are  therefore  “misspecified”   We  now  know  from  literature  that  results  of  standard  models  do  not   necessarily  hold  for  mul4-­‐sided  pla>orms   Market   DefiniIon   Standard  SSNIP  and    UPP  tests  wrong  for  mul4-­‐sided  pla>orms.   Standard  tests  are  mathema4cally  wrong  and  give  biased  results   Economic   models  of   exclusionary   pracIces     Economic  models  (e.g.  Whinston  on  tying)  based  on  many  assump4ons  to   begin  with  and  not  very  robust.   Results  do  not/may  not  once  interdependent  demand  between  two  sides  is   introduced.   © Global Economics Group. Do Not Distribute Without Permission 12
  13. 13. Section 2 CRITICAL MASS AND VERTICAL RESTRAINTS
  14. 14. YouTube Ignited in Late 2005 TABLE 1 -- YOUTUBE UNIQUE VISITORS ('000) 70,000.000 Both  sides  essenIal  for  launch   60,000.000 YouTube  needed  content  creators  and   content  viewers   50,000.000 40,000.000 YOUTUBE 30,000.000 Need  strategies  to  get  both  sides  on  board   YouTube  tried  mul4ple  strategies  to  increase   uploading  and  viewing  of  videos   20,000.000 IgniIon  requires  geQng  enough  on  board   10,000.000 ma y jun 05 0 jul 5 aug 05 sep 05 oct 05 nov 05 dec 05 jan 05 feb 06 ma 06 r ap 06 ma r 06 y0 jun 6 0 jul 6 aug 06 sep 06 oct 06 nov 06 dec 06 jan 06 feb 07 ma 07 r ap 07 ma r 07 y0 jun 7 0 jul 7 aug 07 sep 07 oct 07 nov 07 dec 07 jan 07 feb 08 08 0.000 Slow  growth  from  February  to  December   2005  when  YouTube  shows  an  inflec4on  point   © Global Economics Group. Do Not Distribute Without Permission 14
  15. 15. Platforms Need Critical Mass to Ignite CriIcal  mass   Cri4cal  mass  refers  to  the  minimal  set  of  customers  on  each  side   that  is  large  enough  to  aeract  more  customers  and  result  in   sustainable  posi4ve  feedback   CriIcal  mass  depends  on  scale  and  balance   Probability  of  customers  from  two  sets  gejng  together  and   exchanging  value  increases  with  the  number  of  customers  on   each  side   PlaRorms  implode  if  they  can’t  reach  criIcal  mass   If  there  aren’t  enough  customers  on  the  other  side  the   probability  of  advantageous  exchange  falls  and  customers  don’t   join  and  the  early  adopters  who  have  eventually  leave     © Global Economics Group. Do Not Distribute Without Permission 15
  16. 16. Successful Platform Launch Depends on Critical Mass CriIcal  mass  corresponds  to  a  combinaIon  of  scale  and  balance  that  is   minimally  sufficient  to  ignite  the  plaRorm   1200   1000   800   600   400   200   Each  point  reflects  a  combina2on  of  scale  (how  many  customers)     and  balance  (propor2on  of  customer  types)   0   0   200   © Global Economics Group. Do Not Distribute Without Permission 400   600   800   1000   16
  17. 17. Critical Mass, Platform Ignition and Growth Catalytic Ignition and Critical Mass Side  A   Ignition D*- Long-run equilibrium C` Points of critical mass Movements at starting to achieve critical mass C* C`` O © Global Economics Group. Do Not Distribute Without Permission Side B In  this  example  the   cri4cal  mass  points   are  between  C’  and   C”.       C*  is  the  point  that   would  lead  to   op4mal  pla>orm   launch.         Points  to  the  NW  of   the  vector  0-­‐C’  and  to   the  SW  of  vector  0-­‐C”   would  result  result  in   pla>orm  implosion.   17
  18. 18. Three Phases of Platform Growth IniIaIon   TABLE 1 -- YOUTUBE UNIQUE VISITORS ('000) Pla>orm  undertakes  strategies  to  get  to  cri4cal   mass   70,000.000 60,000.000 IgniIon  and  Rapid  Growth   50,000.000 Pla>orm  reaches  cri4cal  mass  and  gets  self-­‐ sustaining  posi4ve  feedback  effects   40,000.000 YOUTUBE Maturity   30,000.000 20,000.000 Pla>orm  reaches  profitable  equilibrium  and   grows  through  compe44on  and  market  growth   10,000.000 ma y jun 05 0 jul 5 aug 05 sep 05 oct 05 nov 05 dec 05 jan 05 feb 06 ma 06 r ap 06 ma r 06 y0 jun 6 0 jul 6 aug 06 sep 06 oct 06 nov 06 dec 06 jan 06 feb 07 ma 07 r ap 07 ma r 07 y0 jun 7 0 jul 7 aug 07 sep 07 oct 07 nov 07 dec 07 jan 07 feb 08 08 0.000 © Global Economics Group. Do Not Distribute Without Permission Some  pla>orms  can  secure  precommitments  from  both  sides  and     thereby  collapse  ini4a4on  and  igni4on  into  immediate  growth  at    startup.   18
  19. 19. Initiation and Getting to Critical Mass Early   adopters   Customers  who  like  to  try  new  things   High-­‐value   customers   Customers  that  place  high  expected  value  on  par4cipa4ng  in  the  pla>orm   Highly   aUracIve   customers   Exclusive   deals     Customers  on  one  side  who  are  highly  valued  to  customers  on  the  other   sides   ExpectaIons   of  success   Shape  customer  expecta4ons  that  the  pla>orm  will  provide  value  in  order   to  get  customers  to  mul4-­‐home  or  single  home  on  pla>orm   Exclusive  deals  force  customers  on  the  other  side  to  use  the  pla>orm  to   gain  access  to  these  customers   © Global Economics Group. Do Not Distribute Without Permission 19
  20. 20. Making It Harder for Rivals to Reach Critical Mass Lock  enough   demand  on   either  side   By  keeping  available  demand  below  the  minimal  level  on  either  side  the   new  pla>orm  cannot  reach  the  cri4cal  mass  fron4er.   Lock  up   enough   demand  on   both  sides   By  locking  up  enough  demand  on  both  sides  the  new  pla>orm  cannot  reach   the  cri4cal  mass  fron4er     Lock  up  key   assets   needed  for   igniIon   By  locking  up  customers  that  account  for  a  dispropor4onate  share  of   posi4ve  feedbacks,  are  early  adopters,  or    high  value  users,  or  by   preemp4ng  exclusive  deals,    the  new  pla>orm  could  be  prevented  from   reaching  the  cri4cal  mass  fron4er   These  are  possibili4es.  Unclear  how  significant  they  are  in  prac4ce  given  that  rivals  have   counterstrategies.   © Global Economics Group. Do Not Distribute Without Permission 20
  21. 21. Vertical Restraints that Might Deter Entry Exclusive   Deals   Locks  up  demand  on  one  or  both  sides  of  the  pla>orm     CondiIonal   rebates   Discourages  customers  from  using  rival  pla>orm  and  therefore  engaging  in   mul4homing  or  single  homing  with  entrant     Other     restraints   Behavioral  restraints  (tying,  pricing  restric4ons,  various  behavioral   restraints,  etc.)  could  raise  the  cost  of  commijng  demand  to  a  rival   pla>orm     © Global Economics Group. Do Not Distribute Without Permission 21
  22. 22. Some Procompetitive Explanations of Vertical Restraints Exclusivity   benefits   customers   Customers  on  side  B  benefit  from  knowing  that  when  they  use  the  pla>orm   they  will  be  get  access  to  par4cular  customers  on  side  A.    Reduces  their   search  and  transac4ons  costs.   Exclusivity   reduces   plaRorm  risks   By  reducing  risk  that  customers  on  one  side  will  reduce  demand  and   thereby  jeopardize  value  of  the  value  to  all  sides  the  pla>orm  is  able  to   make  greater  sunk  cost  investments  including  in  innova4on.   Exclusivity   prevents  free   riding   Pla>orm  may  have  incurred  significant  risks  in  entering  in  developing   customer  groups  to  maximize  pla>orm  value.    Exclusivity  agreements   prevent  copycats  from  freeriding.   Behavioral   restricIons   benefit   customers   Restric4ons  on  side  A  customers  benefit  side  B  customers  by  preven4ng   opportunism   © Global Economics Group. Do Not Distribute Without Permission 22
  23. 23. Balancing and Some Complexities Degree  of   impediment  to   entry   Impediment  depends  on  the  “type”  of  customers  excluded  as   well  as  and  perhaps  more  so  than  sheer  volume  of  demand   foreclosure.    Could  prevent  entry  by  foreclosing  some  demand   on  both  sides.     Counter   strategies   Stage  of   Can  differen4a4on  enable  entry  despite  exclusive  deals  by  incumbent   pla>orms?    Can  entrant  enter  into  exclusive  deals  of  its  own?   compeIIon   Incumbent  may  have  exclusive  dealing  arrangements  as  part  of  entry   strategy  to  deal  with  cri4cal  mass   Behavioral   restricIons   Ver4cal  restraints  may  benefit  customers  that  are  not  subject  to  ver4cal   restraints  (e.g.  the  other  side  of  the  pla>orm).     Incumbent  vs.   Entrant  could  be  powerful  pla>orm  in  adjacent  business  while  incumbent   could  be  successful  startup.  Difficult  to  assess  impact  of  an4trust  restraints   entrant   on  long  run  social  welfare  (Microso  vs.  Netscape).   © Global Economics Group. Do Not Distribute Without Permission 23
  24. 24. Section 3 PLATFORM GOVERNANCE AND VERTICAL RESTRAINTS
  25. 25. Platforms Harness Externalities A  Place  to   Get  Together   Pla>orm  provides  a  physical  or  virtual  environment  for  different  types  of   customers  to  get  together.         Ways  to   Connect  and   Create  Value   Pla>orm  provides  search  and  matching  methods  for  helping  customers  find   “value-­‐crea4ng”  transac4ons  and  for  exchanging  value.   Manage   externaliIes   Pla>orms  manage  posi4ve  and  nega4ve  externali4es  to  increase  value  that   members  can  realize  from  the  pla>orm.         © Global Economics Group. Do Not Distribute Without Permission 25
  26. 26. Platforms Helping One Side Kanyon  Mall  in  Turkey  “is  appropriately   named  in  light  of  the  shape  of  the  building,   with  the  "canyon  walls"  comprised  of  four   winding  retail  levels.”  The  canyon  was   made  primarily  with  stone,  4le  and   concrete.       © Global Economics Group. Do Not Distribute Without Permission 26
  27. 27. Platform Design and Rules Promote Positive Externalities SorIng  Devices   to  Get  Right   Customers   “Exclusionary  vibe”     (JDate  discourages  Gen4les)   “Exclusionary  amenity”     (Upscale  anchor  stores  discourages  low-­‐end  shoppers)   Search   Diversion   Design  rules  encourage  one  type  of  agent  to  meet  another  type  of   agent  who  really  values  them  but  may  not  seek  out  by  themselves   Shopping  malls  with  anchor  stores  at  either  end   © Global Economics Group. Do Not Distribute Without Permission 27
  28. 28. Platforms and Bad Behavior SAC  Insider  Case  Rides  Finra   Referral  to  Cohen’s  Backyard   © Global Economics Group. Do Not Distribute Without Permission Vitaly Borker Gets 4 Years for Threats, Terror Used to Boost Google Rankings 28
  29. 29. Governance of Bad Behavior that Mitigates Negative Externalities Rules   Prohibi4ons  on  ac4ons  that  could  harm  other  agents     (usually  those  on  other  side  of  match/transac4on)   eBay  has  detailed  rules  for  buyer  and  seller  behavior   No  misleading  ads  (sellers)  and  no  mul4ple  auc4ons  for  same  good  (buyers)   DetecIon  and   Monitoring   Systems  to  determine  if  rules  are  being  broken   Facebook  has  hundreds  of  employees  looking  for  bad  pictures  and   bad  language   Enforcement   Pla>orms  have  and  use  “Bouncers  Rights”  to  exclude  violators   Google  manually  reduces  ranks  of  websites  that  violate  rules  for  90   days  and  some4mes  delists  websites   © Global Economics Group. Do Not Distribute Without Permission 29
  30. 30. Welfare Effects of Rules PromoIng   posiIve   externaliIes   has  costs   Sor4ng  devices  harm  customers  that  can’t  get  on  pla>orm  or  don’t   get  their  preferred  matches   Governing  bad   behavior  has   costs   Customers  lose  benefits  from  viola4ons   PlaRorm  has   incenIves  to   balance   benefits  and   costs   Pla>orm  can  make  more  money  by  promo4ng  posi4ve  externali4es   and  reducing  nega4ve  ones   Search  diversion  benefits  side  that  gets  from  looks  but  not   necessarily  side  that  has  been  diverted.   Customers  also  lose  from  false  posi4ves  in  enforcement   Pla>orm  value  is  greater  and  pla>orm  profit  greater  too   © Global Economics Group. Do Not Distribute Without Permission 30
  31. 31. Vertical Restraints and Platform Governance AnI-­‐steering/ exclusive   dealing  rules   Might  deter  entry,  but…   No  surcharge   rules   Might  deter  entry,  but  …   Give  customers  on  other  side  assurance  that  when  they  use  the   pla>orm  they  will  get  the  pla>orm’s  products   Prevents  opportunis4c  behavior  and  provides  customers  price   certainty  for  pla>orm   PlaRorm   exclusion   penalIes  and   rules   Might  prevent  alterna4ve  pla>orm  from  accessing  users,  but  …   Punishes  customers  on  one  side  from  harming  customers  on  the   other  side  through  fraud,  decep4on,  and  other  bad  behavior.   © Global Economics Group. Do Not Distribute Without Permission 31
  32. 32. Section 4 ANTITRUST ANALYSIS OF VERTICAL RESTRAINTS
  33. 33. Factors to Consider in Evaluating Vertical Restraints for Platforms Impact  of   restraints  on   achieving  criIcal   mass   To  what  extent  do  restraints  preclude  strategies  necessary  for  reaching  cri4cal  mass  and   are  there  effec4ve  counterstrategies   PlaRorm  and   Industry  Stage  of   Development   Restraints  more  likely  to  be  residue  of  procompe44ve  strategy  and  s4ll  provide  efficiencies   in  earlier  stages.   Impact  on  all  sides   Benefits  and  costs  should  be  evaluated  by  looking  at  impact  on  all  customer  sides   Role  in  managing   externaliIes   Possible  efficiencies  from  managing  posi4ve  and  nega4ve  pla>orm  externali4es  should  be   considered.   Robustness  of   standard   economic  models   No  reason  to  believe  that  the  result  of    economic  models  that  do  not  consider   interdependent  demand  hold  for  mul4sided  pla>orms  and  results  of  literature  so  far  show   that  the  results  do  not  in  fact  hold  in  important  cases.   © Global Economics Group. Do Not Distribute Without Permission 33
  34. 34. Thank You! DAVID  S.  EVANS   Global  Economics  Group  |  Chairman   david.evans@globaleconomicsgroup.com   Mobile:  +1  617  320  8933   Skype:    david.s.evans   © Global Economics Group. Do Not Distribute Without Permission 34

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