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

33 Pages Posted: 19 Dec 2019

See all articles by Andrew Stivers

Andrew Stivers

NERA Economic Consulting

Doug Smith

Federal Trade Commission Bureau of Economics

Ginger Zhe Jin

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 3, 2019

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

Suggested Citation

Stivers, Andrew and Smith, Douglas and Jin, Ginger Zhe, The Alchemy of a Pyramid: Transmutating Business Opportunity Into a Negative Sum Wealth Transfer (December 3, 2019). Available at SSRN: https://ssrn.com/abstract=3497682 or http://dx.doi.org/10.2139/ssrn.3497682

Andrew Stivers (Contact Author)

NERA Economic Consulting ( email )

1255 23rd St NW Ste 600
Washington, DC 20037
United States

Douglas Smith

Federal Trade Commission Bureau of Economics ( email )

600 Pennsylvania Ave NW
Washington, DC 20580
United States

Ginger Zhe Jin

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-3484 (Phone)
301-405-3542 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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