DIRECT SELLING UNDER SCRUTINY
W
hen DSEF Fellow Dr. Robert Peterson, the John T. Stuart Chair in Business Administration at The University of Texas at Austin (UTA), reviewed the white paper “Alchemy of a Pyramid Scheme: Transmutating Business Opportunity into a Negative Wealth Transfer,” he found it deeply flawed. In his view the paper, authored by Andrew Stivers, Douglas Smith, and Ginger Zhe Jin, all current and former Federal Trade Commission (FTC) economists, contained myriad errors in analytic modeling.
Co-author Dr. Anne Coughlan believes direct selling companies are rightly troubled by the ramifications of the SSJ paper. “What’s concerning here is that this paper exhibits many errors of bad modeling,” she said. “But the fact that it does so is problematic because the paper will have an impact if, and when, it gets published. It will not only have an effect in the academic community, but it will affect the perception of direct selling in the public eye, potentially among policymakers and in the legal and litigation realm.”
“As a professor, I have followed the academic research streams and associated literature on direct selling for more than four decades,” Dr. Peterson said. “So, when the Stivers, Smith, and Jin (SSJ) working paper came to my attention, I thought I would give it a cursory review. Because the paper was not peer-reviewed and was not a published article, I did not expect to devote much time or effort to it.
SSJ provides insight into the thinking of the FTC when it comes to their understanding of the direct selling business model, and Dr. Coughlan says the task force co-authors set out to evaluate the paper’s assumptions. “Since three of the authors bear the FTC moniker, we wanted to put some special scrutiny on this paper, particularly given its conclusions, to make sure that it is backed up by good analysis.”
“After I read the first sentence in the paper, however— ‘Multi-level marketing (MLM) is a distribution and incentive mechanism that has seen extensive scrutiny by law enforcement over the last 50 years, but by comparison relatively little in the economics and marketing literature,’—I was, to put it mildly, aghast,” Dr. Peterson continued. “Based on my knowledge of direct selling, the opposite is true. Literally hundreds of economics- and marketing-related articles have been published on direct selling in the past half-century, whereas only a relatively few (but well-publicized) court cases have been reported.”
In December 2020, the co-authors publicly released their working paper: “Direct Selling Under Scrutiny: Assessing Analytic Direct Selling Models,” on SSRN, a platform for the dissemination of early-stage research. (The working paper was not funded by any entity and the co-authors have no financial conflicts of interest). The paper examines the SSJ model and other research that develops economics-based analytic models that are sometimes used to assess the legitimacy of direct selling companies as well as the business model.
Consequently, Dr. Peterson sought opinions on the paper from several of his colleagues—all DSEF Fellows—who had extensively published research in prestigious academic journals, were experienced in reviewing research submitted to such journals, and possessed a deep understanding of the direct selling channel. Ultimately this group, along with Dr. Peterson, formed an independent task force that formally evaluated the SSJ paper: Dr. Patrick Brockett, UTA; Dr. Anne Coughlan, NU; Dr. O.C. Ferrell, AU; Dr. Linda Ferrell, AU; Dr. Linda Golden, UTA; Dr. Charles Ingene, OU; and Dr. Lou Pelton, UNT.
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Academic Task Force Rebuts Misguided Assumptions About Direct Selling
January 2021
“It is critically important to the direct selling channel that policymakers be able to distinguish legitimate direct selling companies from illegal pyramid schemes,” said Marjorie Fine, Director of Shaklee Corporation. “The formulation of laws, their enforcement by regulators, decisions by judges, and the perception of the public all depend upon understanding this distinction. This paper by leading academics constitutes a significant contribution to that effort. It completely debunks the model proposed in ‘The Alchemy of a Pyramid: Transmutating Business Opportunity into a Negative Wealth Transfer’ by exposing the fallacies upon which the model is constructed and the errors in the authors’ analysis.”
