US government (and other major purchaser) "second sourcing" regulations are a longstanding attempt to keep a competitive market in situations where it would otherwise collapse into a monopoly. That's how Intel came to share x86 with AMD in the first place.
I'm not sure what you mean. We wouldn't have AMD now, and the utterly non-competitive x86 CPU market would look entirely different than it does now. Despite AMD not being competitive on performance in the past ~10ish years, they were still an alternative if Intel ever really dropped the ball or went off the rails on exploitative business practices. Without that counterweight, there would've been no limit to what Intel could've done.
More needs to be done to ensure proprietary silos like Apple, but second sourcing has, largely, done its job.
The nature of competition requires an advantage of some kind, or advancement won’t be very fast. The limit to what I think the free market would allow would be the government splitting funding for research and for production, and for any contractor to fulfill production orders without paying for licenses.
It seems more likely that splitting foundries would be successful, with some sort of anti-trust mechanism to prevent a foundry and an IP developer from having too much favoritism (or advantage from scale).
I can think of multiple alternatives that could be taken in isolation or combined.
- Regulating the market and splitting foundries from their IP developers (this may not even be necessary at this point)
- Funding development of a rich set of public-domain IP that could be used to build a common standard platform
- Direct all government purchases to be of such public-domain standards
- If necessary, fund capacity so that the foundry market remains competitive even in small runs.