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An economic model of multi-level marketing

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  • Yaniv Reingewertz

Abstract

This paper offers an economic model of the operation of multi-level marketing (MLM) firms in competitive and non-competitive markets. The model takes a recursive approach to analyse decision making at the distributor level in order to understand basic issues in the MLM market and firm structure. Specifically, it is shown that under reasonable assumptions MLM firms will have a limited structure. In cases where commissions increase with the number of levels, MLM firms will include no more than six to nine levels in equilibrium. In cases of fixed commissions, market conditions dictate a cap on the number of distributors. These conditions imply a limited “multi-level” structure. They also imply that the revenues of the median distributor are mainly a result of direct sales and not a result of commissions. The model also suggests that MLM firms will only arise where marketing costs are substantial, and that it is primarily individuals with small outside offers who choose to become distributors. Finally, the model provides a formula that calculates market prices for a monopoly MLM firm.

Suggested Citation

  • Yaniv Reingewertz, 2021. "An economic model of multi-level marketing," PLOS ONE, Public Library of Science, vol. 16(7), pages 1-18, July.
    • Handle: RePEc:plo:pone00:0253700
    DOI: 10.1371/journal.pone.0253700
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    References listed on IDEAS

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    1. Claudia Groß & Dirk Vriens, 2019. "The Role of the Distributor Network in the Persistence of Legal and Ethical Problems of Multi-level Marketing Companies," Journal of Business Ethics, Springer, vol. 156(2), pages 333-355, May.
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