The Behavioral Economics of Multilevel Marketing

Authors

Heidi H. Liu, University of Pennsylvania Carey Law SchoolFollow

Document Type

Article

Publication Date

2018

Abstract

Multilevel marketing companies (MLMs) - sales organizations that compensate independent consultants based on the sales and recruitment of other consultants - form a significant part of the American economy. Yet, MLMs provide little information to regulators and potential participants regarding potentially material information. Although MLMs are often compared to pyramid schemes, consultants argue that participation in a MLM allows them to make money outside of the traditional full-time labor force. This paper examines the law, economics, and psychology of MLMs, suggesting that MLMs may draw on prospective consultants' cognitive biases in persuading consultants to join and continue a MLM. Consultants may be led to focus on unlikely benefits and to conform to notions of success that seem consistent with the "American dream" - even to their financial loss.

Keywords

Law & economics, multilevel marketing, MLM, psychology, cognitive & behavioral biases, independent consultants, contracts, pyramid schemes

Publication Title

Hastings Business Law Journal

Publication Citation

14 Hastings Bus. L. J. 109 (2018)

Repository Citation

Liu, Heidi H., "The Behavioral Economics of Multilevel Marketing" (2018). All Faculty Scholarship. 2518.
https://scholarship.law.upenn.edu/faculty_scholarship/2518