Multilevel Marketing: Pyramid-Shaped Schemes or Exploitative Scams?

We identify the conditions on the tendency of agents to spread information by word of mouth, under which a principal can design a pyramid scam to exploit a network of agents whose beliefs are coarse. We find that a pyramid scam is sustainable only if its underlying reward scheme compensates the participants on multiple levels of recruitments (e.g., for recruiting new members and for recruitments made by these new members). Motivated by the growing discussion on the legitimacy of multilevel marketing schemes and their resemblance to pyramid scams, we compare the two phenomena based on their underlying compensation structure.