<p>I do not believe there is any direct econometric evidence because nowadays, aside from the North Korea, there are almost no centrally planned economies left. Furthermore, there are no straightforward ways of measuring the 'diversity of business models'.</p>
<p>However, according to <a href="https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_683-1" rel="nofollow noreferrer">Kowalik (2016)</a> centrally planed economies are characterized by:</p>
<blockquote>
<p>a hierarchical pattern of national economy, which in turn presupposes obedience and discipline. ...</p>
</blockquote>
<blockquote>
<p>Using information on the economy’s shape and tendencies at any given moment, the central authority formulates a set of general guidelines of the plan, possibly based on prior special studies and forecasts. The plan’s guidelines include such aggregates as the distribution of the national income between accumulation and consumption, the shares and main directions of investment by sectors, the desired rate of overall economic growth etc. These guidelines as a rule are pre-defined by the leading bodies of the ruling party, and are then disaggregated by the government into guidelines for particular industrial ministries and local authorities to produce their own draft plans, which are further disaggregated and communicated to industrial associations and individual enterprises. Government guidelines include two kinds of indices; directives, which are mandatory for local planners in drafting their blueprints (whatever alteration may prove necessary can only be made by a superior agency) and information indices. The enterprise draft plans are then aggregated by industrial associations and branch ministries, and their draft plans are in turn aggregated into a national (or central) economic plan for one or five years which is usually approved by parliament. Only after that are final corrections and adaptations introduced into lower-level plans. This particular procedure of plan construction has been called the ‘spindle technique’ in reference to textile machines, for guidelines and draft versions first travel from the top downwards, then up, and then again down the hierarchy.</p>
</blockquote>
<blockquote>
<p>...</p>
</blockquote>
<blockquote>
<p>plan fulfilment is a fundamental obligation of each economic organization. Managers and, to some extent the workforce as well, are evaluated for their plan performance and rewarded or penalized accordingly. Tasks named in an enterprise plan are both commands by a superior authority and obligations to supply enough resources to safeguard smooth cooperation.</p>
</blockquote>
<p>Given that the characteristics of central planning are:</p>
<ul>
<li>hierarchical pattern of national economy</li>
<li>obedience and discipline</li>
<li>plan fulfillment is obligation of all economic actors.</li>
</ul>
<p>Given these characteristics, one can reasonably conclude that the diversity of business plans should be smaller than in free market economies, which are decentralized by nature. It is reasonable to expect  hierarchical economy that requires obedience and discipline and everyone to follow central plan to offer less scope for diversity of business models than more decentralized economic systems.</p>
<hr />
<p>PS: However, I do not believe one can automatically conclude that system with larger diversity of business models is necessarily more robust system.</p>

CC BY-SA 4.0
2022-03-18T09:20:42.973Z
2022-03-18T09:20:42.973Z
1muflon1
<p>Let's unpack the discussion into two parts: how we think of free market and business models.</p>
<h3>Free Market Economy</h3>
<p>The question is pretty clear in drawing direct comparison between free market economy and centrally planned economy. The problem is that this comparison is very difficult to observe empirically, either because</p>
<ol>
<li>an economy that's completely planned has fewer business models for any given industry almost by definition, since each model is designed from scratch by the planner, or</li>
<li>there are very few economies that are centrally planned entirely; comparing the rest of the world to a handful of countries means you are going to observe less variety in the latter.</li>
</ol>
<p>A nice historical (some might call anecdotal) example that follows the comparison you drew would be the story of the two Carl Zisses following the split of Germany. The YouTube channel Asianometry has <a href="https://youtu.be/8PXZsJsB4DY" rel="nofollow noreferrer">a great explainer</a> on this story; you could also check Shapiro (1973) for an academic exposition. This is a country-to-country, industry-to-industry comparison down to the company level that has less of an apples-to-oranges problem, however it's just one data point, and as Asianometry's explanations shows, the divergence of the two Carl Zeisses is driven by politics as much as it is by economics.</p>
<p>A more fruitful approach to the question might be to drop the dichotomy of free market versus central planning. The forces of a free market can be found among entrepreneurial street vendors in Cuba and Venezuela, and the power wielded by monopolists or oligopolists in major industries in the US are not entirely dissimilar to those enjoyed by central planners, in particular because such oligopolistic powers also have their political roots. Faccio and Zingales (2021) study the telecom industry and find that companies enjoy higher prices from regulations that are less pro-competition in countries where they have more political connections, such as the US. The effect of such market power with political backing can be felt directly by consumers; the Chicago Booth Review <a href="https://www.chicagobooth.edu/review/want-lower-phone-bill-call-congress" rel="nofollow noreferrer">highlights</a> one number from their study:</p>
<blockquote>
<p>American consumers would gain \$44 billion–\$65 billion if the US telecoms market were as competitive as those in Denmark and Germany.</p>
</blockquote>
<p>It might be surprising for people who don't follow this line of research or who haven't lived in both the US and somewhere else, that the US no longer leads the world in terms of how free consumer markets are. Gutiérrez and Philippon (2018) document a series of policies in the US and Europe to explore exactly what led to lower regulatory barriers in the Europe than in the US.</p>
<h3>Business Models</h3>
<p>I don't have a clear definition of business models. In the strictest sense, this might mean how a company produces its output (goods or services) in a given industry, but it could extend to what industry or product space a company chooses to enter before even makign decisions on production. If we stick to the strict version of the definition, than I would actually conjecture the opposite of what you proposed: free market, defined as having greater competition (instead of being the opposite of central planning, as discussed above), would imply less variety in how a given product is produced, because competition weeds out all the less efficient production methods and retains the one with best profits. An inefficient business model is more likely to survive with political ties or even simply by inertia where there's little competition, such as high prices for phone plans in the US or the monopoly of a local mom-and-pop shop.</p>
<p>The reasoning would also depend on the industry being discussed. Comparing street vendors in the US and in North Korea would be very different from comparisons in the tech industry, which is probably not accomplishing much in North Korea except for maybe military applications. Observations like the lack of a vibrant tech industry in North Korea might be what led to your observation that free markets are better for variety; but these countries, aside from being centrally planned, are also incredibly poor. It's hard to say whether the boring tech landscape is the product of poverty or central planning, or maybe the poverty itself is the result of planning. So your reasoning might be correct in a broader sense: central planning is bad for growth and thus people have less stuff to choose from.</p>
<p>If we are going to keep the discussion of business models to how a given product is produced, across varying levels of market competition, then results really depend on the industry we are talking about. Take a specific example from the tech industry: the fiercely competitive market for the hard disk drive. The products form different companies in this market are mostly similar compared to, e.g. varieties in social network apps, so the comparison makes more sense. Do we observe less innovation when the government is involved in consolidation decisions? Igami and Uetake (2020) find &quot;plateau-shaped equilibrium relationships between competition and innovation&quot;, which means the degree of innovation doesn't vary a lot across levels of competition in plausible ranges of market conditions. So at least for this large and important market, we wouldn't see much variation in business models across sensible levels of government interventions.</p>
<h3>References</h3>
<ul>
<li>Faccio, Mara, and Luigi Zingales. &quot;Political Determinants of
Competition in the Mobile Telecommunication Industry.&quot; The Review of
Financial Studies (2021).</li>
<li>Gutiérrez, Germán, and Thomas Philippon. &quot;How European markets became
free: A study of institutional drift.&quot; No. w24700. National Bureau of
Economic Research, 2018.</li>
<li>Igami, Mitsuru, and Kosuke Uetake. &quot;Mergers, innovation, and
entry-exit dynamics: Consolidation of the hard disk drive industry,
1996–2016.&quot; The Review of Economic Studies 87.6 (2020): 2672-2702.</li>
<li>Shapiro, Isaac. &quot;Zeiss v. Zeiss—The Cold War in a Microcosm.&quot; The
International Lawyer (1973): 235-251.</li>
</ul>

CC BY-SA 4.0
2022-03-18T19:28:12.117Z
2022-03-18T19:28:12.117Z
ykc
<p>The main model of this question in economics is <a href="https://scholar.harvard.edu/files/mankiw/files/free_entry.pdf" rel="nofollow noreferrer">Mankiw and Winston (1986)</a>. They show that a competitive economy can have more or less firms than a centrally planned economy.</p>
<p>Their setup involves a fixed cost of entry for each business and each business is a little different so consumers benefit from having more companies. A central planner balances the fixed cost of entry against the <strong>societal benefit of having more varieties</strong>.</p>
<p>On the other hand, a competitive entrant balances the fixed cost of entry against <strong>the businesses profits</strong> if they enter. This leads to too many firms when businesses are similar, but too few firms when businesses are different.</p>
<p>Of course, in these models the centrally planned economy is the best. That is because they ignore any of the real world issues with central planning.</p>

CC BY-SA 4.0
2022-03-18T20:20:53.187Z
2022-03-18T20:28:22.303Z
2022-03-18T20:28:22.303Z
dsmithecon
<p>I have a mere hunch that in a free market economy, a greater variety of business models can be supported or sustained in each industry, when compared to a more centrally planned economy. However, I can't seem to reason this out in a way that makes it clear why this must be so.</p>
<p>The closest I can get to is that division of labor is limited by the extent of the market (from Adam Smith). In a socialist economy, we would expect less division of labor because of restrictions on markets and on trade. Therefore, <em>if</em> business model diversity is also a kind of division of labor, then we would expect to see more of this in a free market economy.</p>
<p>Another, more promising line of reasoning comes from Hayek's essay on The Use of Knowledge in Society: Due to the fact that a market economy is better positioned to exploit the &quot;knowledge of particular circumstances of time and place&quot;, and since this knowledge can be used to create new business models, a free market economy would be able to sustain a greater diversity of business models.</p>
<p>I'm not 100% sure of my reasoning or of the validity of the hunch itself. I'd appreciate some insights on this.</p>

CC BY-SA 4.0
2022-03-18T14:53:45.907Z
Can you elaborate more about what do you mean by "greater variety of business models"?
Dayne
CC BY-SA 4.0
2022-03-19T02:44:39.527Z
@Dayne: What I mean is that given certain market conditions, there may be many ways of satisfying the demand, where each way is a business model that converts raw inputs into finished products, in a way that is economically sustainable, and generates an income for the producer.
Joebevo
CC BY-SA 4.0
2022-03-19T06:12:40.827Z
In economics terminology are you referring to different products which are substitutes (for example variety of cars) or different ways of producing the same car, i.e., technology? Btw, either way, 'business model' is not a good terminology here.
Dayne
CC BY-SA 4.0
2022-03-21T05:24:38.110Z
Yes, I see that now. I mainly meant different ways of producing the same widget.
Joebevo
<markets><innovation><adam-smith><friedrich-hayek>
Does a free market economy sustain a greater variety of business models in any given industry?
Joebevo
# Does a free market economy sustain a greater variety of business models in any given industry?

(Asked by: username_0 on 2022-03-15)

I have a mere hunch that in a free market economy, a greater variety of business models can be supported or sustained in each industry, when compared to a more centrally planned economy. However, I can't seem to reason this out in a way that makes it clear why this must be so.

The closest I can get to is that division of labor is limited by the extent of the market (from Adam Smith). In a socialist economy, we would expect less division of labor because of restrictions on markets and on trade. Therefore, *if* business model diversity is also a kind of division of labor, then we would expect to see more of this in a free market economy.

Another, more promising line of reasoning comes from Hayek's essay on The Use of Knowledge in Society: Due to the fact that a market economy is better positioned to exploit the "knowledge of particular circumstances of time and place", and since this knowledge can be used to create new business models, a free market economy would be able to sustain a greater diversity of business models.

I'm not 100% sure of my reasoning or of the validity of the hunch itself. I'd appreciate some insights on this.

**Tags:** markets, innovation, adam-smith, friedrich-hayek

> **Comments:**
> **username_1**: Can you elaborate more about what do you mean by "greater variety of business models"?  
> **username_0**: @username_1: What I mean is that given certain market conditions, there may be many ways of satisfying the demand, where each way is a business model that converts raw inputs into finished products, in a way that is economically sustainable, and generates an income for the producer.  
> **username_1**: In economics terminology are you referring to different products which are substitutes (for example variety of cars) or different ways of producing the same car, i.e., technology? Btw, either way, 'business model' is not a good terminology here.  
> **username_0**: Yes, I see that now. I mainly meant different ways of producing the same widget.  

---

## 3 answers

### Answer by username_2 on 2022-03-18. Score: 1

I do not believe there is any direct econometric evidence because nowadays, aside from the North Korea, there are almost no centrally planned economies left. Furthermore, there are no straightforward ways of measuring the 'diversity of business models'.

However, according to [Kowalik (2016)](https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_683-1) centrally planed economies are characterized by:

> a hierarchical pattern of national economy, which in turn presupposes obedience and discipline. ...

> Using information on the economy’s shape and tendencies at any given moment, the central authority formulates a set of general guidelines of the plan, possibly based on prior special studies and forecasts. The plan’s guidelines include such aggregates as the distribution of the national income between accumulation and consumption, the shares and main directions of investment by sectors, the desired rate of overall economic growth etc. These guidelines as a rule are pre-defined by the leading bodies of the ruling party, and are then disaggregated by the government into guidelines for particular industrial ministries and local authorities to produce their own draft plans, which are further disaggregated and communicated to industrial associations and individual enterprises. Government guidelines include two kinds of indices; directives, which are mandatory for local planners in drafting their blueprints (whatever alteration may prove necessary can only be made by a superior agency) and information indices. The enterprise draft plans are then aggregated by industrial associations and branch ministries, and their draft plans are in turn aggregated into a national (or central) economic plan for one or five years which is usually approved by parliament. Only after that are final corrections and adaptations introduced into lower-level plans. This particular procedure of plan construction has been called the ‘spindle technique’ in reference to textile machines, for guidelines and draft versions first travel from the top downwards, then up, and then again down the hierarchy.

> ...

> plan fulfilment is a fundamental obligation of each economic organization. Managers and, to some extent the workforce as well, are evaluated for their plan performance and rewarded or penalized accordingly. Tasks named in an enterprise plan are both commands by a superior authority and obligations to supply enough resources to safeguard smooth cooperation.

Given that the characteristics of central planning are:

* hierarchical pattern of national economy
* obedience and discipline
* plan fulfillment is obligation of all economic actors.

Given these characteristics, one can reasonably conclude that the diversity of business plans should be smaller than in free market economies, which are decentralized by nature. It is reasonable to expect hierarchical economy that requires obedience and discipline and everyone to follow central plan to offer less scope for diversity of business models than more decentralized economic systems.

---

PS: However, I do not believe one can automatically conclude that system with larger diversity of business models is necessarily more robust system.


---

### Answer by username_3 on 2022-03-18. Score: 1

Let's unpack the discussion into two parts: how we think of free market and business models.

### Free Market Economy

The question is pretty clear in drawing direct comparison between free market economy and centrally planned economy. The problem is that this comparison is very difficult to observe empirically, either because

1. an economy that's completely planned has fewer business models for any given industry almost by definition, since each model is designed from scratch by the planner, or
2. there are very few economies that are centrally planned entirely; comparing the rest of the world to a handful of countries means you are going to observe less variety in the latter.

A nice historical (some might call anecdotal) example that follows the comparison you drew would be the story of the two Carl Zisses following the split of Germany. The YouTube channel Asianometry has [a great explainer](https://youtu.be/8PXZsJsB4DY) on this story; you could also check Shapiro (1973) for an academic exposition. This is a country-to-country, industry-to-industry comparison down to the company level that has less of an apples-to-oranges problem, however it's just one data point, and as Asianometry's explanations shows, the divergence of the two Carl Zeisses is driven by politics as much as it is by economics.

A more fruitful approach to the question might be to drop the dichotomy of free market versus central planning. The forces of a free market can be found among entrepreneurial street vendors in Cuba and Venezuela, and the power wielded by monopolists or oligopolists in major industries in the US are not entirely dissimilar to those enjoyed by central planners, in particular because such oligopolistic powers also have their political roots. Faccio and Zingales (2021) study the telecom industry and find that companies enjoy higher prices from regulations that are less pro-competition in countries where they have more political connections, such as the US. The effect of such market power with political backing can be felt directly by consumers; the Chicago Booth Review [highlights](https://www.chicagobooth.edu/review/want-lower-phone-bill-call-congress) one number from their study:

> American consumers would gain \$44 billion–\$65 billion if the US telecoms market were as competitive as those in Denmark and Germany.

It might be surprising for people who don't follow this line of research or who haven't lived in both the US and somewhere else, that the US no longer leads the world in terms of how free consumer markets are. Gutiérrez and Philippon (2018) document a series of policies in the US and Europe to explore exactly what led to lower regulatory barriers in the Europe than in the US.

### Business Models

I don't have a clear definition of business models. In the strictest sense, this might mean how a company produces its output (goods or services) in a given industry, but it could extend to what industry or product space a company chooses to enter before even makign decisions on production. If we stick to the strict version of the definition, than I would actually conjecture the opposite of what you proposed: free market, defined as having greater competition (instead of being the opposite of central planning, as discussed above), would imply less variety in how a given product is produced, because competition weeds out all the less efficient production methods and retains the one with best profits. An inefficient business model is more likely to survive with political ties or even simply by inertia where there's little competition, such as high prices for phone plans in the US or the monopoly of a local mom-and-pop shop.

The reasoning would also depend on the industry being discussed. Comparing street vendors in the US and in North Korea would be very different from comparisons in the tech industry, which is probably not accomplishing much in North Korea except for maybe military applications. Observations like the lack of a vibrant tech industry in North Korea might be what led to your observation that free markets are better for variety; but these countries, aside from being centrally planned, are also incredibly poor. It's hard to say whether the boring tech landscape is the product of poverty or central planning, or maybe the poverty itself is the result of planning. So your reasoning might be correct in a broader sense: central planning is bad for growth and thus people have less stuff to choose from.

If we are going to keep the discussion of business models to how a given product is produced, across varying levels of market competition, then results really depend on the industry we are talking about. Take a specific example from the tech industry: the fiercely competitive market for the hard disk drive. The products form different companies in this market are mostly similar compared to, e.g. varieties in social network apps, so the comparison makes more sense. Do we observe less innovation when the government is involved in consolidation decisions? Igami and Uetake (2020) find "plateau-shaped equilibrium relationships between competition and innovation", which means the degree of innovation doesn't vary a lot across levels of competition in plausible ranges of market conditions. So at least for this large and important market, we wouldn't see much variation in business models across sensible levels of government interventions.

### References

* Faccio, Mara, and Luigi Zingales. "Political Determinants of
  Competition in the Mobile Telecommunication Industry." The Review of
  Financial Studies (2021).
* Gutiérrez, Germán, and Thomas Philippon. "How European markets became
  free: A study of institutional drift." No. w24700. National Bureau of
  Economic Research, 2018.
* Igami, Mitsuru, and Kosuke Uetake. "Mergers, innovation, and
  entry-exit dynamics: Consolidation of the hard disk drive industry,
  1996–2016." The Review of Economic Studies 87.6 (2020): 2672-2702.
* Shapiro, Isaac. "Zeiss v. Zeiss—The Cold War in a Microcosm." The
  International Lawyer (1973): 235-251.


---

### Answer by username_4 on 2022-03-18. Score: 0

The main model of this question in economics is [Mankiw and Winston (1986)](https://scholar.harvard.edu/files/mankiw/files/free_entry.pdf). They show that a competitive economy can have more or less firms than a centrally planned economy.

Their setup involves a fixed cost of entry for each business and each business is a little different so consumers benefit from having more companies. A central planner balances the fixed cost of entry against the **societal benefit of having more varieties**.

On the other hand, a competitive entrant balances the fixed cost of entry against **the businesses profits** if they enter. This leads to too many firms when businesses are similar, but too few firms when businesses are different.

Of course, in these models the centrally planned economy is the best. That is because they ignore any of the real world issues with central planning.


---

