Multilevel marketing: pyramid-shaped schemes or exploitative scams?

Yair Antler ()
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Yair Antler: Coller School of Management, Tel Aviv University

Theoretical Economics, 2023, vol. 18, issue 2

Abstract: Motivated by the growing discussion on the resemblance of multilevel marketing schemes to pyramid scams, we compare the two phenomena based on their underlying compensation structures. We show that a company can design a pyramid scam to exploit a network of agents with coarse beliefs and that this requires the company to charge the participants a license fee and pay them a recruitment commission for each of the people that they recruit and that their recruits recruit. We characterize the schemes that maximize a company's profit when it faces fully rational agents, and establish that the company never finds it profitable to charge them a license fee or pay them recruitment commissions.

Keywords: Multilevel marketing; pyramid schemes; bounded rationality; reward schemes; coarse reasoning (search for similar items in EconPapers)
JEL-codes: D84 D86 L29 (search for similar items in EconPapers)
Date: 2023-05-11
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Citations: View citations in EconPapers (1)

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