How does agile velocity reflect team performance

So my company has recently started implementing more agile practices. We have been split into 3 agile development teams which seems to work pretty well.

The problem I am trying to get my head around is how the sprints we are doing are being used to measure performance. The management team has mapped all 3 teams velocities together on a chart to see how they stack up.

This doesn't seem right to me, it doesn't seem possible to compare two teams. For instance, could one team just inflate their estimates to increase the amount of story points they can complete? I'm sure I am missing something, I just can't see what it is.

Also, how does the business use development velocity? How does showing them that this team can complete x story points per sprint help them estimate how long something will take when points are only assigned to tasks at the start of each sprint?

Thanks in advance 🤯