Pyramid scheme

In pyramid schemes, the organizers force those who wish to join to pay entrance fees, promising the new members a share of the money received from the new participants attracted by them. Part of the funds raised is the income of the organizers, for whom the scheme is profitable, regardless of whether they perform any real work. Membership in the scheme itself becomes a strong incentive to continue attracting newbies and transfer money to the top of the pyramid. Such organizations rarely sell products or services with real value. The main source of income for this scheme is to attract a large number of newcomers or to demand additional payments from current members.

The behavior of pyramidal schemes follows closely enough the graph of exponential growth . Each lower level of the pyramid is much larger than the one above. In order for such a scheme to provide money for all who became its member, it would have to expand indefinitely. This is impossible, because the population of the Earth is finite. When the inevitable absence of newcomers comes, without having other sources of income, the scheme collapses.

In pyramid schemes, people in the upper levels usually make a profit, while people in the lower levels usually lose money. Since geometrically the largest elements are at the end, most of the participants in the scheme will be at the lower levels of the pyramid, who only paid for the connection, but have not yet received any income. Therefore, the pyramid scheme is characterized by several people (including the creators of the scheme) who receive large sums of money, while most of those who join this scheme lose money. For this reason, such schemes are considered fraudulent ^[2] .

In this model, each person should attract only two others, but this lightness is compensated for by the increased depth that is required to get a result. The model on four levels contains a total of fifteen members - this is the sum of the first four members of the geometric progression 1 + 2 + 4 + 8 = 15. Many real schemes are more complex. In this case, a simple model is considered, which can be traced in many cases.

Let's call the levels from top to bottom: “captain”, “co-pilots”, “crew” and “passengers”. There are many variants of names, but it does not matter. Such schemes may try to downplay their pyramidal nature, talking about “gifts” when money is “given” ^[3] .

Eight “passengers” must pay (or “donate”) an amount (for example, 5,000 rubles each) to join this scheme. The collected amount (40,000 rubles) is received by the “captain”, who leaves, and the rest move one level up. Two new “captains” appear, so the group is divided in half, and in each group eight new “passengers” are required. A person who joins the scheme as a passenger will not receive anything until he is promoted to “captain”. Therefore, participants in the lower three levels of the pyramid lose their money if the scheme collapses.

If a person uses this model as a fraud, thanks to a small trick he will take most of the money. It is enough to fill in the first three levels (10 people in total) with the names of friends to guarantee the receipt of the first payments without paying a penny. The money received is enough to re-enter the game as a “passenger”, assuring everyone of its effectiveness and extending the scheme as long as possible, hoping to receive a second payment.

Matrix Schemes

In matrix schemes, participants pay to join the queue to receive the desired goods or services for free or at a discount price. When a certain number of new people join such a “queue”, the person at the head receives the desired product. For example, a participant on the highest rung might need to have ten newcomers in order to get the item and leave the queue. Every beginner needs to buy an expensive but potentially useless item, such as an e-book, to take his place in the queue. To turn left the next party requires the completion of its new party newbies. The organizer of the scheme receives a profit due to the excess of the total income from newcomers over the value of the goods transferred to the exiting queue. Since the matrix schemes correspond to the same laws of geometric progression as the pyramids, only a part of the participants will ever be able to really get what they want. The scheme collapses when more people don't want to join the queue.

Schemes may not indicate the position in the queue of the alleged "winner", which, in fact, makes such a scheme a lottery. In some countries, matrix schemes are illegal.

Although pyramid schemes are often confused with financial pyramids ( Ponzi schemes), they differ from each other.

In pyramid schemes, money is sent to the top, while the intermediate parts of the pyramid usually do not receive benefits. Such schemes fail simply because there are not enough people.

Financial pyramids are based on the principle of payment of the promised income to all who had previously arrived at the expense of the proceeds from those who came later, who have not yet received the right to receive income. In other words, the organizer takes money from some people, a part remains for himself, and gives the rest to others who have previously invested in the scheme.

Some financial pyramids contain elements of multi - level marketing , thus forming a combination of them.

Some multi-level marketing companies act as a pyramid scheme. Legitimate multilevel marketing is often confused with pyramidal schemes ^{[1] [4] [5] [6]} .

According to the definition of the US Federal Trade Commission , the legal marketing scheme has a real product for sale ^[7] . “If the money you receive is based on your sales to third parties, this could be a legitimate multi-level marketing plan. If your money is based on the number of people you recruit and your sales to them, it could probably be a pyramid scheme. ”

However, pyramid schemes can simply use the product to hide their pyramidal structure ^[5] .

The Federal Trade Commission warns: “It is better not to participate in plans in which the money you receive is based mainly on the number of distributors you recruit and on your sales to these people, and not on your sales to people who intend to actually use the product " ^[8] .