Multilevel Marketing: Pyramid-Shaped Schemes or Exploitative Scams?

Résumé

A scheme organizer designs a pyramid scam in order to exploit agents who rely on a simplified model of the world. We find necessary and sufficient conditions on the agents' tendency to spread information by word-of-mouth under which he is able to do so. Further, we show that in order to sustain a pyramid scam, the organizer compensates the participants for recruits made in at least two levels of their downline. Motivated by the growing discussion on the legitimacy of multilevel marketing schemes and their resemblance to pyramid scams, we draw the boundary between the two phenomenons based on the underlying compensation structure.