When well-meaning rules backfire: California’s accidental monopolies

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OPINION – California is known for leading the way with new laws and high standards. From environmental rules to consumer protections, our state often sets the tone for the rest of the country. However, even well-meaning rules can have a side effect called a compliance moat. This happens when regulations become so complicated and expensive that only the largest companies can afford to follow them. The result is a shrinking market where small businesses disappear, leaving behind accidental monopolies that hurt the people the laws were meant to protect.

The idea of a compliance moat is simple. As the cost of doing business goes up because of paperwork and legal requirements, the entry fee for a market increases. A large international company sees these costs as a normal part of doing business. For a big corporation, hiring a team of compliance officers is just another expense. For a local startup or a mid-sized competitor, that same requirement can be a breaking point. When the regulatory burden gets too high, smaller players leave the market. They do not leave because their products are bad, but because they cannot afford the cost of the red tape.

Some people argue that strict standards are the only way to keep the public safe and the environment clean. They might say that any criticism of complex rules is just a call to get rid of them entirely. This is not true. We must separate the importance of the goal from the complexity of the process. High standards for clean air or privacy are vital. However, if the process to prove compliance is so difficult that only two companies in the state can manage it, we have not protected the public. We have given those two companies a duopoly.

We can see this happening in the energy and insurance sectors in California. Because the state requires a unique fuel blend that is not made elsewhere, we have created an energy island. This means any new competitor faces massive costs just to start shipping fuel to our state. As independent refineries shut down because they cannot afford the costs of new mandates, the supply of fuel is left in the hands of a few large companies. This makes our state more likely to see price spikes and supply shortages. By making it nearly impossible for smaller players to stay in business, we have effectively handed market control to a few giants.

It is also important to realize that big companies often do not fight complex regulations. In many cases, they prefer them. For a dominant player, a complicated new law is a competitive advantage: it stops the next innovator from ever getting started. This is the ultimate irony. The rules meant to keep big business in check often become the walls that protect them from the small businesses that would otherwise challenge them. This is not a failure of our values, but a failure of our regulatory design.

When a market is healthy, competition helps keep prices low and encourages new ideas. When a market is trapped behind a compliance moat, that pressure goes away. The remaining big companies no longer have to work as hard because the law itself protects them from competition. In this environment, the consumer loses twice. They pay more for the cost of compliance, and they lose the benefits of having more choices.

To fix this, California should start testing new policies for monopoly risk before they are passed. Every new law or agency rule should include a study on how it affects competition. Leaders should ask if the rule favors the biggest players and if a small business can reasonably follow it without an army of lawyers. Ensuring a fair playing field is not about lowering our standards. It is about making sure those standards are met by a healthy, diverse market rather than a protected few.

Will Lu is a government operations manager and graduate student at Cornell University studying public and private partnerships.