Competitive Effects of Requiring Sales Thresholds to Trigger Higher Commissions

We consider a game between two capacity providers that compete for customers through a broker who works on commissions and sells to both loyal and non-loyal customers. The capacity providers compete by selecting commission margins and sales thresholds at which commissions on all sales increase. We show that in equilibrium, contracts require positive sales thresholds. The threshold requirement can be best described as a mechanism for one provider to profit at the expense of the other. For exogenous commission margins, we show that it is the provider with the lower margin who benefits from thresholds at the expense of the broker. However, the gains for the lower margin provider can be a mirage in full equilibrium, where commission margins are endogenous.