marginal profitability is increased

marginal profitability is increased and S’~ will be raised, and vice versa. 7 The demand shock in market 1, by increasing A’s opportunity cost of selling in market 2, shif’ts A’s reaction curve inward to (Firm A increases its output in market 1, thus increasing its marginal costs in market 2 50 that it will lower S~ for any given ~ The new Nash equilibrium is at N’. Firm A’s strategic variable has decreased marginally, while B’s strategic variable has increased slightly. At equi- librium a~rrA/aS=~= 0, 50 that the slight change in ~ has a negligible effect on A’s profits. But the small change in S~j has a first-order effect. In our numerical example, an increase in Sc~ of’ one unit re- duces A’s profits by $1.00 times A’s sales in market 2. If firm A had joint economies across markets 1 and 2, a positive demand shock in market 1 would push A’s market 2 reaction curve outward. In that case the new equilibrium would entail a slight de- crease in S’~, providing a strategic benefit to A. If (f’rom B’s viewpoint) the products were strategic complements, B’s reaction curve would be upward sloping around N.8 The exact opposite results would then occur. Withjoint diseconomies both firms would be less aggressive so the strategic effect of the change in S~ on iT A would be positive. Withjoint economies both firms would be more aggressive and the change in S~ would hurt firm ~ Finally, note that the counterintuitive result of reduced total profits for A when market 1 is made more profitable is generally true if the strategic effect is negative and sales in market 1 are sufficiently small. The total effect of a profitability shock, AZ, on A’s profits is