How does a Product based Pyramid Scheme work?
In: Economics
They usually don’t.
In a pure pyramid scheme, the only way to make money is to recruit new investors, who can only make money by recruiting new investors. Eventually you run out of new investors, and everyone but the people on the top loses their money. Pyramid schemes like this are illegal.
What isn’t illegal is to use a pyramid scheme as an incentive, so long as there is a legitimate product or service that people can make money from selling. I make $10,000 from selling makeup or herbal supplements or laundry detergent or whatever, and $500 for recruiting new distributors, that’s fine and legal.
The problem is the product is often a sham. Why would any legitimate salesperson want to recruit more salespeople if they were making money on their own? If they can only make real money by recruiting, the product itself is often incidental.
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