The Alchemy of a Pyramid: Transmutating Business Opportunity Into a Negative Sum Wealth Transfer

Abstract

Multi-level marketing (MLM) presents a challenging informational environment for participants. MLMs offer participants the right to sell a product with the recursive right to recruit new participants.

In addition to typical business opportunity challenges of assessing retail demand, individuals face challenges in trying to understand the recruitment opportunity. To illuminate the difference between a potentially beneficial MLM and a harmful one - typically referred to as a pyramid - we model the pricing decisions of an MLM firm. We take beliefs about the value of an associated product and about the probability of recruitment as given, but potentially wrong. We find that participant optimism about the offer creates expected loss from demand - as is usual for deceptively marketed business opportunities - but also creates an opportunity for the firm to induce a transfer scheme, and associated losses related to that scheme, independent of consumer demand for any product.

Keywords: multi-level marketing, pyramids