Mechanisms for Multi-Level MarketingYuval EmekComputer Engineering andNetworks LaboratoryETH ZurichZurich, [email protected] KaridiMicrosoft Israel Innovation LabHerzeliya, [email protected] TennenholtzMicrosoft Israel R&D CenterandTechnion–Israel Institute ofTechnologyHerzeliya, [email protected] ZoharMicrosoft ResearchSilicon Valley LabMountain View, CA, [email protected] marketing is a marketing approach that moti-vates its participants to promote a certain product amongtheir friends. The popularity of this approach increases dueto the accessibility of modern social networks, however, itexisted in one form or the other long before the Internetage began (the infamous Pyramid scheme that dates backat least a century is in fact a special case of multi-level mar-keting). This paper lays foundations for the study of rewardmechanisms in multi-level marketing within social networks.We provide a set of desired properties for such mechanismsand show that they are uniquely satisfied by geometric re-ward mechanisms. The resilience of mechanisms to false-name manipulations is also considered; while geometric re-ward mechanisms fail against such manipulations, we exhibitother mechanisms which are false-name-proof.Categories and Subject DescriptorsJ.4 [Social and Behavioral Sciences]: EconomicsGeneral TermsEconomics, TheoryKeywordsmulti-level marketing, pyramid scheme, reward mechanisms1. INTRODUCTIONSocial networks are everywhere: our e-mail and phone ad-dress books, our family relatives, and our business connec-tions, all define either explicit or implicit social networks.Permission to make digital or hard copies of all or part of this work forpersonal or classroom use is granted without fee provided that copies arenot made or distributed for profit or commercial advantage and that copiesbear this notice and the full citation on the first page. To copy otherwise, torepublish, to post on servers or to redistribute to lists, requires prior specificpermission and/or a fee.EC’11, June 5–9, 2011, San Jose, California, USA.Copyright 2011 ACM 978-1-4503-0261-6/11/06 ...$10.00.Social networks have existed long before the Internet, buttheir recent web-based form, as exhibited by companies likeFacebook, Twitter, or LinkedIn, made them more tangible.In their new manifestation, social networks have become anattractive playground for viral marketing: the dream of anymarketer is that her products will be promoted via “word ofmouth” (which relies on social networks). In order to makethat dream a reality, various forms of marketing have beenadvocated. The so-called affiliate marketing, direct mar-keting, and multi-level marketing all refer to (overlapping)approaches that facilitate viral marketing. In this paper, weshall adhere to the term multi-level marketing, as it seemsto be the least restrictive one.The fundamental idea behind multi-level marketing is thatAlice, who already purchased the product, is rewarded forreferrals, i.e., for purchases made by Bob as a result of Alice’spromotion. The reward mechanism associated with multi-level marketing may take various forms. In particular, Alicemay be rewarded for both purchases made by Bob and forBob’s own referrals in a recursive manner.The potential to accumulate small rewards from each per-son to a sizable sum is important as it allows advertisersto attract early adopters and trendsetters that are of greatvalue to them. On the downside, the possibility of gath-ering a large sum has also inspired more illicit versions ofmulti-level marketing, namely pyramid schemes. These ille-gal1mechanisms, essentially based on the notion of indirectreferrals, are not intended to promote a real product, butrather to collect money from the social network, althoughsometimes a product is used in an attempt to cover the na-ture of the pyramid scheme and bypass legal restrictions.In these cases, customers seldom enjoy the actual productbeing promoted (when a product is being promoted), butare only participating in the (usually false) hope of gettingrewards from recruiting others.Needless to say that selecting an appropriate reward mech-anism is inherent to the design of a successful multi-levelmarketing scheme. Interestingly, despite the popularity of1The current paper does not take legal issues into consider-ation. In particular, our analysis will not make the distinc-tion between legitimate multi-level marketing and pyramidschemes.209work on information spreading and influence in social net-works (see, e.g., the survey in [11]) the study of reward mech-anism design in that context has been almost completelyneglected. Such study is the main subject of the currentpaper.Consider for example the following basic coupon drivenscheme. Upon purchase of the product, Alice is givencoupons that she can distribute among her friends. Then,for any purchase made by Bob in which Alice’s coupon isused, Alice is rewarded with appropriate rebates on futurepurchases. This scheme and similar ones, are easy to imple-ment and have become quite standard in our daily life. Notethat the coupon driven scheme does not exploit indirect re-ferrals: Alice is not rewarded by purchases made with Bob’scoupons or with the coupons of Bob’s referrals.Reward mechanisms that exploit indirect referrals usedto be difficult to implement as they require some centralauthority that keeps track of the referral structure. Infor-mation technology has made this task much easier. Considerfor example the setting in which Alice promotes a productby publishing a link to the seller’s web-site in her blog orFacebook page. Bob can buy the product by clicking onthat link; together with the actual product, Bob receives alink to the seller’s web-site that he can also publish in hisblog or Facebook page. The seller’s web-site can easily iden-tify Bob as a buyer that followed Alice’s link.2This way acomplete record of direct and indirect referrals can clearlybe maintained. This ease of implementation makes rewardmechanisms that take indirect referrals into account evenmore appealing than they have been before.Are indirect referrals really that important? We believeso. To demonstrate their significance, suppose that Bob is arock music authority and that following Alice’s promotion,he downloads a new rock song. If Bob recommends this songin his blog, and consequently many other users downloadthis song, then Alice certainly played