Actually, the more free a market is the less of a problem this becomes. For every Blockbuster Inc. out there perfectly happy with the way things are now, the free market tends to produce three or four Nexflixes who are more than happy to cut margins, innovate and broaden the market.

Of course, with monopolies you get the kind of perverse incentives you're describing. Phone technology and prices stagnated for a decade or two when Bell had a de facto monopoly. I would still argue that a free market tends to produce fewer monopolies than any other practical regulatory scheme, but that's a topic for another post.