Commissions and Sales Thresholds under Competitions

We consider a game between two capacity providers that compete for customers through a broker who earns commissions on sales. The providers compete by selecting commission margins and sales targets above which the margins on all sales increase. We are interested in the form of the contracts in equilibrium, and the effect that targets, with endogenous margins, have on the profit split between the providers and the broker. We show that in equilibrium, contracts require positive targets, a fact that can be best described as a mechanism for the larger provider to profit at the expense of the smaller provider. A very different story arises when margins are fixed exogenously and the providers compete by setting sales targets. In this case we show that it is the provider with the lower margin who benefits from targets at the expense of the broker who in this context resists the imposition of positive sales targets.