An economic model of multi-level marketing

Research output: Contribution to journalArticlepeer-review

Abstract

This paper offers an economic model of the operation of multi-level marketing (MLM) firms in competitive and non-competitive markets. The model takes a recursive approach to analyse decision making at the distributor level in order to understand basic issues in the MLM market and firm structure. Specifically, it is shown that under reasonable assumptions MLM firms will have a limited structure. In cases where commissions increase with the number of levels, MLM firms will include no more than six to nine levels in equilibrium. In cases of fixed commissions, market conditions dictate a cap on the number of distributors. These conditions imply a limited "multi-level"structure. They also imply that the revenues of the median distributor are mainly a result of direct sales and not a result of commissions. The model also suggests that MLM firms will only arise where marketing costs are substantial, and that it is primarily individuals with small outside offers who choose to become distributors. Finally, the model provides a formula that calculates market prices for a monopoly MLM firm.

Original languageEnglish
Article numbere0253700
JournalPLoS ONE
Volume16
Issue number7 July
DOIs
StatePublished - Jul 2021

Bibliographical note

Publisher Copyright:
© 2021 Yaniv Reingewertz. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

ASJC Scopus subject areas

  • General

Fingerprint

Dive into the research topics of 'An economic model of multi-level marketing'. Together they form a unique fingerprint.

Cite this