Competition through Commissions and Kickbacks

Abstract

In markets for retail financial products and health services, consumers often rely on the advice of intermediaries to decide which specialized offering best fits their needs. Product providers, in turn, compete to influence the intermediaries' advice through hidden kickbacks or disclosed commissions. Motivated by the controversial role of these widespread practices, we formulate a model to analyze competition through commissions from a positive and normative standpoint. The model highlights the role of commissions in making the advisor responsive to supply-side incentives. We characterize situations when commonly adopted policies such as mandatory disclosure and caps on commissions have unintended welfare consequences. (JEL D21, D82, D83, G21, L15, L25)

Equilibrium selection in sequential games with imperfect information

“…18 Their …nding that no speci…c restriction on the set of beliefs can …t well with the data is consistent with our theory. Beyond this negative …nding, it is di¢ cult to conduct an equilibrium analysis with their data, because in their experiment, no group of players play according to any equilibrium.…”

“…The selection criterion based on selecting equilibria that can be supported by such passive beliefs is the one most frequently used in the literature, not only in games of multilateral vertical contracting (Hart and Tirole (16); O'Brien and Sha¤er (23); Segal (30); Fontenay and Gans (10); Rey and Tirole (27); Inderst and Ottaviani (18)) but also in games of electoral competition in which two candidates make o¤ers to voters 2 in multiple districts (Gavazza and Lizzeri (12)). The assumption of "passive beliefs" is also common in the consumer search literature: for instance consumers do not revise their beliefs about a …rm's quality when it charges an unexpected price (see for instance recent applications by Bar-Isaac, Caruana and Cuñat (4) or Buehler and Schuett (5)).…”

Equilibrium Selection in Sequential Games with Imperfect Information

“…For the second half of the experiment (rounds [21][22][23][24][25][26][27][28][29][30][31][32][33][34][35][36][37][38][39][40], in the treatment in which pork is almost e¢ cient and we predict that candidates o¤er pork to every district, 62% of groups play an equilibrium action pro…le, and among these groups that play an equilibrium, 94% of them play the equilibrium action pro…le in which candidates o¤er pork to every district (as we predict), while 0% of them play the equilibrium with no pork.…”

“…Rey and Tirole (35); Inderst and Ottaviani (24); Caprice (9)) but also in games of electoral competition in which two candidates make o¤ers to voters in multiple districts (Gavazza and Lizzeri (16)). The assumption of "passive beliefs" is also common in the consumer search literature: for instance consumers do not revise their beliefs about a …rm's quality when it charges an unexpected price (see for instance recent applications by Bar-Isaac, Caruana and Cuñat (5) or Buehler and Schuett (7)).…”

Price Coherence and Adverse Intermediation

“…Separately, a small literature examines the use of commissions and kickbacks by intermediaries, most prominently Inderst and Ottaviani (2012). We assume that all buyers are perfectly informed, eliminating concerns about an intermediary inappropriately steering buyers to less suitable sellers as in some of the commissions and kickbacks literature.…”