Theoretical economic analysis reveals that binding minimum wages can increase firm profits and employment under oligopoly competition, highlighting strategic labor and product market interactions.
We examine how minimum wage regulation affects firm profit when labor‐market power interacts with product‐market competition. A binding wage floor reduces the regulated firm's marginal labor cost, inducing it to expand production. This expansion can induce rivals to contract production when relevant strategic variables are strategic substitutes. The mechanism can raise the regulated firm's profit as well as total employment and consumer surplus. We characterize the conditions for profit enhancement and show how labor‐market linkages alter strategic interaction. For instance, in a differentiated‐product Bertrand duopoly with a shared duopsony component, prices can become strategic substitutes, yielding a related profit‐enhancing mechanism.
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Matsushima et al. (2026) studied this question.
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