Marketing Fraud: An Approach for Differentiating Multilevel Marketing from Pyramid Schemes

Abstract

A specific form of direct selling, multilevel marketing (MLM), experienced significant international growth during the 1990s, facilitated in part by the development of the Internet. A corresponding increase in the investigation and prosecution of illegal pyramid schemes occurred during the same period. These parallel activities led to increased uncertainty among marketing managers who used or wished to use the MLM approach. The authors examine similarities between the multilevel approach to marketing and activities associated with illegal pyramid schemes. A mathematical model is used to differentiate between the two on the basis of previous pyramid scheme cases and current U.S. law. The results of the model suggest key factors that marketers interested in MLM will need to consider when developing this type of distribution channel.