nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒04‒28
23 papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. R&D Delegation in a Duopoly with Spillovers By Désiré Vencatachellum; Bruno Versaevel
  2. Minimum quality standards and consumers’ information By Paolo G. GARELLA; Emmanuel PETRAKIS
  3. Two Tales on Resale By Höeffler, Felix; Schmidt, Klaus M.
  4. Price Competition in Markets with Customer Testing: The Captive Customer Effect By Hoppe, Heidrun C.; Lehmann-Grube, Ulrich
  5. Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline By Robert Gagné; Simon Van Norden; Bruno Versaevel
  6. Patent Pools and the Dynamic Incentives to R&D By Vianney Dequiedt; Bruno Versaevel
  7. Rent Seeking, Market Structure and Growth By Daniel Brou; Michele Ruta
  8. Hub Premium, Airport Dominance and Market Power in the European Airline Industry. By Claudio A. Piga; Enrico Bachis
  9. The dynamics of television advertising with boundedly rational consumers By Gomes, Orlando
  10. Pricing strategies by European Low Cost Carriers. By Claudio A. Piga; Enrico Bachis
  11. Conditional R&D Subsidies By Atallah, Gamal
  12. The Optimal Pricing of Pollution When Enforcement is Costly By John K. Stranlund; Carlos A. Chavez; Mauricio G. Villena
  13. Horizontal R&D Cooperation and Spillovers: Evidence from France By Désiré Vencatachellum; Bruno Versaevel
  14. Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market By Alena Bicáková
  15. Price structure and network externalities in the telecommunications industry : evidence from Sub-Saharan Africa By Iimi, Atsushi
  16. Mergers and collusion with asymmetric capacities By Emilie Dargaud
  17. Efficient partnership dissolution under buy-sell clauses By María Angeles de Frutos; Thomas Kittsteiner
  18. Motives for Innovation Co-operation – Evidence from the Canadian Survey of Innovation By Schmidt, Tobias
  19. Competition, Hidden information, and Efficiency: an Experiment By Antonio Cabrales; Gary Charness
  20. Competitive Proposals to Special Interests By Ashish Chaturvedi; Amihai Glazer
  21. Stochastic Games on a Product State Space By Flesch János; Schoenmakers Gijs; Vrieze Koos
  22. Vertical Integration and Dis-integration of Computer Firms: A History Friendly Model of the Co-evolution of the Computer and Semiconductor Industries. By Franco Malerba; Richard Nelson; Luigi Orsenigo; Sidney Winter
  23. Does Signaling Work in Markets for Information Services? An Empirical Investigation for Insurance Intermediaries in Germany By Martina Eckardt

  1. By: Désiré Vencatachellum (HEC Montréal - [HEC Montréal]); Bruno Versaevel (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines])
    Abstract: There is evidence that competing firms delegate R&D to the same independent profit-maximizing laboratory. We draw on this stylized fact to construct a model where two firms in the same industry offer transfer payments in exchange of user-specific R&D services from a common laboratory. Inter-firm and within-laboratory externalities affect the intensity of competition among delegating firms on the intermediate market for technology. Whether competition is relatively soft or tight is reflected by each firm's transfer payment offers to the laboratory. This in turn determines the laboratory's capacity to earn profits, R&D outcomes, delegating firms' profits, and social welfare. We compare the delegated R&D game to two other ones where firms (i) cooperatively conduct in-house R&D, and (ii) non-cooperatively choose in-house R&D. The delegated R&D game Pareto dominates the other two games, and the laboratory earns positive profits, only if within-laboratory R&D services are suffciently complementary but inter-firm spillovers are suffciently low. We find no room for policy intervention, because the privately profitable decision to delegate R&D, when the laboratory participates, always benefits consumers.
    Keywords: Common Agency ; externalities ; research and development
    Date: 2007–04–19
  2. By: Paolo G. GARELLA; Emmanuel PETRAKIS
    Abstract: The literature so far has analyzed the effects of Minimum Quality Standards (MQS) in oligopoly, using models of pure vertical differentiation, with only two firms, and perfect information. We consider products that are differentiated horizontally and vertically, with imperfect consumers' information, and more than two firms. We show that a MQS changes the consumers' perception of produced qualities. This increases the firms' returns from quality enhancing investments, notwithstanding contrary strategic effects. Our analysis justifies the use of MQS in industries where consumers cannot precisely ascertain the quality of goods, for instance pharmaceuticals or products with chemical components involved
    Keywords: Minimum Quality Standards, Imperfect Consumer Information, Oligopoly, Horizontal and Vertical Product Differentiation, Industry Regulation
    JEL: L0 L5
    Date: 2007–04
  3. By: Höeffler, Felix; Schmidt, Klaus M.
    Abstract: In some markets vertically integrated firms sell directly to final customers but also to independent downstream firms with whom they then compete on the downstream market. It is often argued that resellers intensify competition and benefit consumers, in particular when wholesale prices are regulated. However, we show that (i) resale may increase prices and make consumers worse off and that (ii) standard 'retail minus X regulation' may increase prices and harm consumers. Our analysis suggests that this is more likely if the number of integrated firms is small, the degree of product differentiation is low, and/or if competition is spatial.
    Keywords: non-spatial product differentiation; resale regulation; spatial product differentiation; vertical restraints; wholesale
    JEL: D43 L11 L42 L51
    Date: 2007–04
  4. By: Hoppe, Heidrun C.; Lehmann-Grube, Ulrich
    Abstract: We introduce product differentiation into the analysis of price competition in markets where suppliers test customers in order to assess whether they will pay for received goods or services. We find that, if the degree of differentiation is sufficiently high, suppliers may improve the average probability that their clientele will pay by charging higher prices. This helps suppliers to sustain high prices in equilibrium. Moreover, endogenizing locations in product space, we demonstrate that the high price level can be implemented in a pure-strategy subgame-perfect equilibrium with a high degree of differentiation. This is in contrast to the original Hotelling model with linear travel costs where a pure-strategy subgame-perfect equilibrium fails to exist.
    Keywords: Hotelling; Iterated elimination of strictly dominated strategies; Mixed strategy; Price competition; Testing
    JEL: D83 G21 L13
    Date: 2007–04
  5. By: Robert Gagné (CIRANO - Centre interuniversitaire de recherche en analyse des organisations - [Université de Montréal]); Simon Van Norden (CIRANO - Centre interuniversitaire de recherche en analyse des organisations - [Université de Montréal]); Bruno Versaevel (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines])
    Abstract: We analyse the effects of a price floor on price wars (or deep price cuts) in the retail market for gasoline. Bertrand supergame oligopoly models predict that price wars should last longer in the presence of price floors. In 1996, the introduction of a price floor in the Quebec retail market for gasoline serves as a natural experiment with which to test this prediction. We use a Markov Switching Model with two latent states to simultaneously identify the periods of price-collusion/price-war and estimate the parameters characterizing each state. Results support the prediction that price floors reduce the intensity of price wars but increase their expected duration.
    Keywords: gasoline prices ; Markov switching model ; oligopoly supergame ; price regulation
    Date: 2007–04–19
  6. By: Vianney Dequiedt (GAEL - Laboratoire d'Economie Appliquée de Grenoble - [INRA]); Bruno Versaevel (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines])
    Abstract: Patent pools are cooperative agreements between several patent owners to bundle the sale of their respective licenses. In this paper we analyze their consequences on the speed of the innovation process. We adopt an ex ante perspective and study the impact of possible pool formation on the incentives to innovate. Because participation in the creation of a pool acts as a bonus reward on R&D activity, we show that a firm's investment pattern is upward sloping over time before pool formation. The smaller the set of initial contributors, the higher this effect. A pool formation mechanism based on a proposal by the industry and acceptance/refusal by the competition authority may induce overinvestment in early innovations. It also leads a forward looking regulator to delay the clearance date of the pool. This may result in a pool size that is suboptimal from an ex ante viewpoint.
    Keywords: competition policy ; licensing ; R&D races ; research and development
    Date: 2007–04–19
  7. By: Daniel Brou; Michele Ruta
    Abstract: We construct a model where firms compete in both political and economic markets. In political markets, firms compete for influence over government transfer policy (rents). This activity can be beneficial for the firm, but is purely wasteful from the point of view of society because resources are utilized to achieve a redistribution of income. In the economic market, firms compete for market share through cost reducing technological innovation. Market structure plays an important role in this economy because competition drives firms to invest more in innovation resulting in higher growth. Rent-seeking affects economic growth in two important ways. It diverts resources away from innovation and it affects the number of firms that are supported in equilibrium. The former has a negative effect on growth while the latter effect is ambiguous, depending on whether rent seeking induces entry or exit. This market structure effect depends on a combination of political and economic factors that the theory highlights.
    Keywords: Rent Seeking, Market Structure, R&D Investment, Growth, Welfare
    JEL: D72 L13 O31
    Date: 2007
  8. By: Claudio A. Piga (Dept of Economics, Loughborough University); Enrico Bachis (Business School, Nottingham University)
    Abstract: Using evidence from an original dataset of more than 12 million fares, this study sheds light on two issues relating to the pricing behaviour of the main European airlines: 1) the extent to which an airline’s dominant position at the origin airport, at the route and the city-pair level affects the airlines’ market power; 2) whether fares follow a monotonic time path consistent with the pursuing of an inter-temporal price discrimination strategy. Our estimates reveal that enjoying a dominant position within a route is conducive to higher fares, possibly because of the limited size of many “natural monopoly” routes that facilitate the incumbent’s engagement in a limit pricing strategy. On the contrary, a larger share within a city-pair does not seem to facilitate the exercise of market power, thereby suggesting the existence of a large degree of substitutability between the routes in a city-pair.
    Keywords: on-line pricing; price discrimination; dispersion; yield management.
    JEL: L11 L13 L93
    Date: 2007–04
  9. By: Gomes, Orlando
    Abstract: The paper adapts a static model of television advertising into a dynamic scenario. In its original form, the model consists on a profit maximization problem of a television network working in a competitive environment. The network sells commercial time to advertisers and tries to minimize the effects of viewers’ aversion to ads. Viewers are assumed heterogeneous with regard to the preferences over the types of products companies sell through ad time. Into this framework we introduce an intertemporal rule reflecting the possible preference changes of consumers (these are boundedly rational and their utility for different types of products varies over time). The introduction of the intertemporal rule originates interesting dynamic results, namely in what concerns the evolution over time of crucial variables like the total time of broadcasting that networks allocate to advertising or the amount of revenues that satisfies the profit maximization condition. As in the original model, attention will be given to the possibility, that cable television allows, of ad addressability.
    Keywords: Television advertising; Networks’ profit maximization; Heterogeneous viewers; Ad addressability; Bounded rationality; Nonlinear dynamics.
    JEL: L82 C61 M37
    Date: 2006–09
  10. By: Claudio A. Piga (Dept of Economics, Loughborough University); Enrico Bachis (Business School, Nottingham University)
    Abstract: We introduce an on-line pricing tactic where airlines post, at the same time and for the same flight, fares in different currencies that violate the law of One Price. Unexpectedly for an on-line market, we find that price discrimination may be accompanied by arbitrage opportunities and that both tend to persist before a flight’s departure. We find discrimination to be of a competitive type, although arbitrage opportunities are more likely in concentrated routes. Finally, the evidence suggests that discrimination may be used to manage stochastic demand.
    Keywords: on-line pricing; price discrimination; Law of One Price; sample selection; dispersion; airlines, exchange rate.
    JEL: L11 L13 L93
    Date: 2007–04
  11. By: Atallah, Gamal
    Abstract: This paper introduces a new type of R&D subsidy, which is conditional on the success of the R&D project. In a three-stage model, the government chooses a subsidy(ies) in the first stage; in the second stage, a monopolist chooses R&D effort which determines the size or the probability of success of the R&D project; in the last stage, the firm chooses its output. It is found that conditional subsidies can yield the same level of innovation and welfare as unconditional subsidies. However, when the probability of success is sufficiently low (be it endogenous or exogenous), conditional subsidies yield suboptimal levels of innovation and welfare. When the firm chooses the probability of success, conditional subsidies can have the advantage of a lower expected cost of the subsidy to the government. I consider the simultaneous use of conditional and unconditional subsidies, and show that different combinations of the two can lead to the same levels of innovation and welfare as unconditional subsidies alone. Finally, reverse conditional subsidies, which the firm gets only if the project fails, are considered. It is found that they yield the same level of innovation as unconditional subsidies, except when the probability of success is sufficiently high. Comparing conditional subsidies with reverse conditional subsidies, conditional subsidies yield higher (lower) welfare when the probability of success is high (low).
    Keywords: R&D subsidies; Innovation; R&D policy; Innovation policy
    JEL: O38 O31
    Date: 2007
  12. By: John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst); Carlos A. Chavez (Departmento de Economia, Universidad de Concepcion, Chili); Mauricio G. Villena (School of Business, Universidad Adolfo Ibanez, Santiago, Chili)
    Abstract: We consider the pricing of a uniformly mixed pollutant when enforcement is costly with a model of optimal, possibly firm-specific, emissions taxes and their enforcement. We argue that optimality requires an enforcement strategy that induces full compliance by every firm. This holds whether or not regulators have complete information about firms’ abatement costs, the costs of monitoring them for compliance, or the costs of collecting penalties from noncompliant firms. Moreover, ignoring several unrealistic special cases, optimality requires discriminatory emissions taxes except when regulators are unable to observe firms’ abatement costs, the costs of monitoring individual firms, or any firm-specific characteristic that is known to be jointly distributed with either the firms’ abatement costs or their monitoring costs. In many pollution control settings, especially those that have been subject to various forms of environmental regulation in the past, regulators are not likely to be so ill-informed about individual firms. In these settings, policies that set or generate a uniform pollution price like conventional designs involving uniform taxes and competitive emission trading with freely-allocated or auctioned permits will not be efficient.
    Keywords: Compliance, Enforcement, Emissions Taxes, Monitoring, Asymmetric Information, Uncertainty
    JEL: L51 Q58
    Date: 2007–04
  13. By: Désiré Vencatachellum (HEC Montréal - [HEC Montréal]); Bruno Versaevel (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines])
    Abstract: We use the French portion of the 2002 Community Innovation Survey to test how spillovers a®ect the likelihood that ¯rms cooperate in R&D. Unlike most existing empirical studies, our results clearly support well-established theoretical predictions of the industrial organization literature. We find that a firm which benefits from higher spillovers from her rivals is more likely to cooperate horizontally in R&D. Moreover, the impact of incoming spillovers on the likelihood of horizontal R&D cooperation is positive and statistically significant only when they are above a threshold. Both the value, and the precision of the estimates, increase with the information flow which firms report receiving from their competitors.
    Keywords: cooperation ; research and development ; spillovers
    Date: 2007–04–19
  14. By: Alena Bicáková
    Abstract: Default rates on instalment loans vary with type of the good purchased. Using an Italian dataset of instalment loans between 1995-1999, we first show that the variation persists even after controlling for contract and individual-specific characteristics, and for the potential selection bias due to credit rationing. We explore whether the residual variation in the default rates across the different types of goods is due to unobserved individual heterogeneity (selection effect) or due to the effect of the specific characteristics of the good (good effect). We claim that the two effects may be interpreted as adverse selection and moral hazard. We exploit the data on multiple contracts per individual to disentangle the two effects, and find that most of the variation is explained by the selection effect. Individuals who buy motorcycles on credit are more likely to default on any loan, while those buying kitchen appliances, furniture and computers are more likely to repay, compared to average. We conclude that there is asymmetric information in the consumer credit market, mostly in the form of adverse selection.
    Keywords: consumer credit, default, adverse selection, moral hazard
    JEL: D12 D14 D82
    Date: 2007
  15. By: Iimi, Atsushi
    Abstract: Many developing countries have experienced significant developments in their telecommunications network. Countries in Africa are no exception to this. The paper examines what factor facilitates most network expansion using micro data from 45 fixed-line and mobile telephone operators in 18 African countries. In theory the telecommunications sector has two sector-specific characteristics: network externalities and discrimina tory pricing. It finds that many telephone operators in the region use peak and off-peak prices and termination-based price discrimination, but are less likely to rely on strategic fee schedules such as tie-in arrangements. The estimated demand function based on a discreet consumer choice model indicates that termination-based discriminatory pricing can facilitate network expansion. It also shows that the implied price-cost margins are significantly high. Thus, price liberalization could be conducive to development of the telecommunications network led by the private sector. Some countries in Africa are still imposing certain price restrictions. But more important, it remains a policy issue how the authorities should ensure reciprocal access between operators at reasonable cost.
    Keywords: Markets and Market Access,Economic Theory & Research,Access to Markets,Rural Communications,Infrastructure Regulation
    Date: 2007–04–01
  16. By: Emilie Dargaud (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines])
    Abstract: When it examines the risk of coordinated effects, an antitrust authority will usually compare the situation where the merger is accepted with an attendant risk of collusion with the benchmark case in which competition is present ex-post. The main objective of this paper is to show that the antitrust authority must take into account the possibility for firms to collude if a merger is rejected. In fact, firms can have incitations to make collusion ex-post (after a rejection of a merger) whereas they would not make collusion ex-ante. All the papers on mergers and collusion tend to look at a minimal discount factor threshold for collusion to be sustained. This article does not only suggest necessary and sufficient conditions for collusion to be enforced but it also analyses the choice which firms have as to whether to collude. We consider an industry with cost-asymmetric firms and we study the analysis of collusion under leniency programmes.
    Keywords: leniency programme ; merger ; oligopoly supergame
    Date: 2007–04–19
  17. By: María Angeles de Frutos; Thomas Kittsteiner
    Abstract: When a partnership comes to an end, partners have to determine the terms of the dissolution. A well known way to do so is by enforcing a buy-sell clause. Under its rules one party offers a price for the partnership and the other party chooses whether to sell her share or buy her partner´s share at this price. It is well known that in a model with private valuations this dissolution rule may generate inefficient allocations. However, we show that if partners negotiate for the advantage of being chooser, then buy-sell clauses result in an ex-post efficient outcome. We argue that this endogenous selection of the proposer is consistent with how buysell clauses are drafted in practice. For an example with interdependent valuations, we further show that the buy-sell clause can perform better than an auction.
    Date: 2006–12
  18. By: Schmidt, Tobias
    Abstract: In this paper we analyse the decision of firms in the Canadian manufacturing sector to co-operate on innovation projects. Our focus is on the motives behind this decision and the firm characteristics, both general and with respect to innovation activities, which influence the motives for innovation co-operation. Using data from the Canadian Survey of Innovation 2005 we find that the factors influencing the decision to co-operate in order to access external knowledge are very similar to those influencing cost-sharing motives. We also show that public funding leads firms to cooperate in order to access external knowledge and R&D.
    Keywords: Innovation Co-operation, Motives for Co-operation, Canadian Survey of Innovation
    JEL: L22 O31 O32
    Date: 2007
  19. By: Antonio Cabrales (Departamento de Economía - [Universidad Carlos III de Madrid]); Gary Charness (Department of Economics - [University of California, Santa Barbara])
    Abstract: We devise an experiment to explore the effect of different degrees of competition on optimal contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how these different degrees of competition affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies remain. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents' informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous' (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.
    Keywords: competition ; efficiency ; experiment ; hidden information
    Date: 2007–04–23
  20. By: Ashish Chaturvedi (Wissenschaftszentrum Berlin für Sozialforschung); Amihai Glazer (Department of Economics, University of California-Irvine)
    Abstract: We consider electoral competition between two political candidates. Each can target private benefits to some groups. A candidate has an incentive to offer high benefits in the initial period, to deter the other candidate from offering yet higher benefits to the same group in a later period. We describe the equilibrium strategies of the candidates, showing that candidates will intend to target different groups, that groups targeted in the initial period gain larger benefits than groups targeted later, and that the benefits to special interests vary with their number and size.
    Keywords: Special interests; Elections
    JEL: D72
    Date: 2007–04
  21. By: Flesch János; Schoenmakers Gijs; Vrieze Koos (METEOR)
    Abstract: We examine product-games, which are n-player stochastic games satisfying: (1) the state space is a product S(1)×…×S(n); (2) the action space of any player i only depends of the i-th coordinate of the state; (3) the transition probability of moving from s(i) ∈ S(i) to t(i) ∈S(i), on the i-th coordinate S(i) of the state space, only depends on the action chosen by player i. So, as far as the actions and the transitions are concerned, every player i can play on the i-th coordinate of the product-game without interference of the other players. No condition is imposed on the payoff structure of the game. We focus on product-games with an aperiodic transition structure, for which we present an approach based on so-called communicating states. For the general n-player case, we establish the existence of 0-equilibria, which makes product-games one of the first classes within n-player stochastic games with such a result. In addition, for the special case of two-player zero-sum games of this type, we show that both players have stationary 0-optimal strategies. Both proofs are constructive by nature.
    Keywords: Economics (Jel: A)
    Date: 2007
  22. By: Franco Malerba (Cespri, Bocconi University, Milano, Italy.); Richard Nelson (Columbia University, New York, USA.); Luigi Orsenigo (University of Brescia and CESPRI, Bocconi University, Milan, Italy.); Sidney Winter (Wharton School, University of Pennsylvania, Philadelphia, USA.)
    Abstract: In this paper we present a history-friendly model of the changing vertical scope of computer firms during the evolution of the computer and semiconductor industries. The model is “history friendly”, in that it attempts at replicating some basic, stylized qualitative features of the evolution of vertical integration on the basis of the causal mechanisms and processes which we believe can explain the history. The specific question addressed in the model is set in the context of dynamic and uncertain technological and market environments, characterized by periods of technological revolutions punctuating periods of relative technological stability and smooth technical progress. The model illustrates how the patterns of vertical integration and specialization in the computer industry change as a function of the evolving levels and distribution of firms’ capabilities over time and how they depend on the co-evolution of the upstream and downstream sectors. Specific conditions in each of these markets – the size of the external market, the magnitude of the technological discontinuities, the lock-in effects in demand – exert critical effects and feedbacks on market structure and on the vertical scope of firms as time goes by.
    Keywords: Industrial Dynamics, Vertical Integration, Specialization, Technology.
    JEL: O30 L10 L60
    Date: 2006–12
  23. By: Martina Eckardt (Witten/Herdecke University)
    Abstract: Insurance intermediation services are information services which exhibit strong information asymmetries. We empirically analyze whether signaling works in the German market for insurance intermediation services. For this a signal must increase service quality and be easily identifiable by consumers so that it pays for intermediaries to spend the related costs. By using OLS and logit estimations we test whether intermediary type, reputational activities and a variety of signaling instruments work as credible signals. Our findings confirm the main hypotheses derived from signaling theory as to the poor working of market forces in markets for information services. Accordingly, public policy regulation is necessary to mitigate the resulting problems.
    Keywords: signaling, insurance intermediation, information services
    JEL: D82 G22 L15 L86
    Date: 2006

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