How Information Cascades Build Multi-Level Marketing Schemes
According to the Federal Trade Commission, Multi-Level Marketing schemes, or MLMs, prioritize the recruitment of new distributors over the sale of products directly to customers. Some of the most famous MLMs include Avon, Mary Kay, and Tupperware. Recently, the release of the Prime Video series LuLaRich introduced many viewers to the MLM LuLaRoe, a women’s clothing brand which gained popularity in the 2010s. LuluRoe is categorized as an MLM since it relies on independent sellers to buy large quantities of their clothing to then resell at a profit.
Herding or an information cascade occurs when people make decisions sequentially, with later people making decisions based on the actions of earlier people, despite any personal information they may hold. MLMs such as LuluRoe rely on information cascades in order to grow the number of distributors they have. In the case of LuluRoe, a simplified version of the information cascade that could have occurred is as follows:
- Potential distributor A researched LuluRoe when the company was in its infancy. They found that they could purchase $5000 worth of leggings. They knew that many of their friends and acquaintances were interested in these kinds of products and would be eager to purchase them. The distributor concludes that they can make money and decides to become a distributor.
- Potential distributor B heard about LuluRoe after person A decided to become a distributor. Based on their own research, they know that have the time and money to buy the minimum amount of LuluRoe products required to become a distributor. Person B decides to become a distributor.
- Potential distributor C heard about LuluRoe after person A and person B decided to become distributors. They do their own research about the company and discover that many distributors have received moldy or faulty products and have lost money. However, since both person A and person B decided to become distributors, person C becomes a distributor too.
In this example, person A and person B both had private information that supported their decision to become a distributor. Person C’s private information conflicted with their decision to become a distributor, but they decided to anyway because they trusted the decision that the people before them made. Thus, LuluRoe was able to keep recruiting distributors, even after newly recruited distributors started to lose money.
Outside link:
https://time.com/6096777/lularich-true-story-amazon/