IDEAS home Printed from https://ideas.repec.org/a/the/publsh/4890.html
   My bibliography  Save this article

Multilevel marketing: pyramid-shaped schemes or exploitative scams?

Author

Listed:
  • 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

    Download full text from publisher

    File URL: http://econtheory.org/ojs/index.php/te/article/viewFile/20230633/36529/1094
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michele Piccione & Ariel Rubinstein, 2003. "Modeling the Economic Interaction of Agents With Diverse Abilities to Recognize Equilibrium Patterns," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 212-223, March.
    2. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
    3. Milo Bianchi & Philippe Jehiel, 2008. "Bubbles and crashes with partially sophisticated investors," Working Papers halshs-00586045, HAL.
    4. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    5. Ville Rantala, 2019. "How Do Investment Ideas Spread through Social Interaction? Evidence from a Ponzi Scheme," Journal of Finance, American Finance Association, vol. 74(5), pages 2349-2389, October.
    6. Sophie Moinas & Sebastien Pouget, 2013. "The Bubble Game: An Experimental Study of Speculation," Econometrica, Econometric Society, vol. 81(4), pages 1507-1539, July.
    7. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    8. Ran Spiegler, 2016. "Bayesian Networks and Boundedly Rational Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1243-1290.
    9. J. L. Gastwirth & P. K. Bhattacharya, 1984. "Two Probability Models of Pyramid or Chain Letter Schemes Demonstrating that Their Promotional Claims are Unreliable," Operations Research, INFORMS, vol. 32(3), pages 527-536, June.
    10. Robert J. Shiller, 2015. "Irrational Exuberance," Economics Books, Princeton University Press, edition 3, number 10421.
    11. Spiegler, Ran, 2014. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, number 9780199334261.
    12. Antler, Yair, 2018. "Multilevel Marketing: Pyramid-Shaped Schemes or Exploitative Scams?," CEPR Discussion Papers 13054, C.E.P.R. Discussion Papers.
    13. repec:dau:papers:123456789/5361 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antler, Yair, 2018. "Multilevel Marketing: Pyramid-Shaped Schemes or Exploitative Scams?," CEPR Discussion Papers 13054, C.E.P.R. Discussion Papers.
    2. Philippe Jehiel, 2022. "Analogy-Based Expectation Equilibrium and Related Concepts:Theory, Applications, and Beyond," Working Papers halshs-03735680, HAL.
    3. Milo Bianchi & Philippe Jehiel, 2008. "Bubbles and crashes with partially sophisticated investors," Working Papers halshs-00586045, HAL.
    4. Ignacio Esponda & Demian Pouzo, 2014. "Berk-Nash Equilibrium: A Framework for Modeling Agents with Misspecified Models," Papers 1411.1152, arXiv.org, revised Nov 2019.
    5. Tolhurst, Tor N., 2018. "A Model-Free Bubble Detection Method: Application to the World Market for Superstar Wines," 2018 Annual Meeting, August 5-7, Washington, D.C. 274387, Agricultural and Applied Economics Association.
    6. Zhang, Mu & Zheng, Jie, 2017. "A robust reference-dependent model for speculative bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 232-258.
    7. Crawford, VP, 2014. "Boundedly rational versus optimization-based models of strategic thinking and learning in games," University of California at San Diego, Economics Working Paper Series qt04h694rz, Department of Economics, UC San Diego.
    8. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    9. Dirk-Jan Janssen & Sascha Füllbrunn & Utz Weitzel, 2019. "Individual speculative behavior and overpricing in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 22(3), pages 653-675, September.
    10. Spiegler, Ran, 2021. "Modeling players with random “data access”," Journal of Economic Theory, Elsevier, vol. 198(C).
    11. repec:dau:papers:123456789/5361 is not listed on IDEAS
    12. Hirota, Shinichi & Huber, Juergen & Stöckl, Thomas & Sunder, Shyam, 2022. "Speculation, money supply and price indeterminacy in financial markets: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1275-1296.
    13. Ran Spiegler, 2016. "Bayesian Networks and Boundedly Rational Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1243-1290.
    14. Ran Spiegler, 2021. "A Simple Model of Monetary Policy under Phillips-Curve Causal Disagreements," Papers 2105.08988, arXiv.org.
    15. Kukushkin, Nikolai S., 2015. "Robert Louis Stevenson's Bottle Imp: A strategic analysis," MPRA Paper 64639, University Library of Munich, Germany.
    16. V. P. Crawford, 2014. "Boundedly rational versus optimization-based models of strategic thinking and learning in games," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 5.
    17. Shinichi Hirota & Juergen Huber & Thomas Stock & Shyam Sunder, 2018. "Speculation and Price Indeterminacy in Financial Markets: An Experimental Study," Cowles Foundation Discussion Papers 2134, Cowles Foundation for Research in Economics, Yale University.
    18. Moinas, Sophie & Pouget, Sébastien, 2009. "The Bubble Game : An experimental Study of Speculation (An earlier version of this paper was circulated under the title "The Rational and Irrational Bubbles : an Experiment")," IDEI Working Papers 560, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jan 2012.
    19. Paul De Grauwe & Marianna Grimaldi, 2004. "Bubbles and Crashes in a Behavioural Finance Model," CESifo Working Paper Series 1194, CESifo.
    20. Carrillo, Juan D. & Palfrey, Thomas R., 2011. "No trade," Games and Economic Behavior, Elsevier, vol. 71(1), pages 66-87, January.
    21. John Conlon, 2005. "Should Central Banks Burst Bubbles?," Game Theory and Information 0508007, University Library of Munich, Germany.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:the:publsh:4890. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Martin J. Osborne (email available below). General contact details of provider: http://econtheory.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.