As economic growth progressed, of course, the market for defense services got bigger, making room for more and more firms. The problem, however, is that if you've got government in an area, it has the power and the incentive to prevent new entry by competing defense firms. Thus, if market conditions initially favor monopoly, monopoly can easily endure due to "lock-in," or "path-dependence."
He is trying to explain why we do not observe peaceful anarchy, that is peaceful societies with private provision of public goods, including security. He takes the view that government is overly stable.
The conventional view, which I share, is that peaceful anarchy is insufficiently stable. It gives way to warlordism. Warlordism means a situation in which there is no rule of law. A warlord rules by rewarding his friends and punishing his enemies.
In my view, it only takes one warlord to break up a peaceful anarchy. Once one warlord becomes successful, then it is easy for a second warlord to recruit followers, because people either envy or fear the followers of the first warlord. This process continues until everyone is driven to follow warlords.
To break a warlord equilibrium, you need government. That is the Hobbesian solution--a Leviathan that is capable of suppressing the "war of all against all."
Government is flawed, because it creates opportunities for rent-seeking. But I will take my chances on the ability of checks, balances, and corruption-fighting institutions to limit rent-seeking. I would not want to risk a descent into warlordism.