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Multilevel marketing: pyramid-shaped schemes or exploitative scams?

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  • Antler, Yair

    (Coller School of Management, Tel Aviv University)

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.

Suggested Citation

  • Antler, Yair, 2023. "Multilevel marketing: pyramid-shaped schemes or exploitative scams?," Theoretical Economics, Econometric Society, vol. 18(2), May.
    • Handle: RePEc:the:publsh:4890
    as

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    References listed on IDEAS

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    13. repec:dau:papers:123456789/5361 is not listed on IDEAS
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    Cited by:

    1. Yair Antler ad Ran Spiegler, 2024. "Competitive Markets with Imperfectly Discerning Consumers," Papers 2409.14885, arXiv.org.

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    More about this item

    Keywords

    Multilevel marketing; pyramid schemes; bounded rationality; reward schemes; coarse reasoning;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L29 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Other

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