The Multi-Level Marketing as a Two-Sided Market

Abstract

The Multi-level marketing (MLM) can be identified as a two-sided market a la Rochet and Tirole (Rochet and Tirole, 2003, 2006; Weyl, 2010). The platform is represented by the promoter of the MLM and the sides are the recruitment activity and the selling activity. The recruitment side has negative network effect on the selling side, and the selling side generates positive network effect in favor of the recruitment side. We compare the social planner's solution with that of the profit-maximizer. We find that, like the newspapers and credit cards two-sided markets studied in Weyl (2010), the MLM business is characterized by some distortions. First, there is a distortion coming from the negative network effect from the recruitment side. The selling side is not a source of distortion or the profit-maximizer can internalize it. Second, there is another distortion due to the signal the promoter uses to increase artificially the valuation of the business and the product. However, this distortion can be mitigated by the recruitment side effect. Also, contrary to the newspapers two-sided market, there is no Spence distortion on the the MLM two-sided market.