This is not the prisoner's dilemma table. The Nash equilibrium is the best possibility for both. When a player chooses S, he helps the collective but also helps himself selfishly. There is nothing anyone can gain by "defecting". Every miner chooses S because it benefits him, not because he has some sort of pact where the other miner does the same.
The defector does gain by defecting; They gain market share. This isn't a prisoner's dilemma, it's just the best way for a mining entity to out-compete the other. It doesn't make a lick of difference that they can make more profit (
Split between the two) by cooperating over a long period of time by not leveraging a competitive advantage over that same period.
Market share and out-competing are means, not an end. The goal of a miner is to maximize his profits. A big miner does this by creating large blocks. Why would he care that the other miner also gets more profit? Is he jealous or something? Please clarify what it is exactly that you're trying to say...
Sure, but the defector gets more profits by capturing market share. The defector gets more profit at 90% market share than his competitor at 10% even if total profit between the two is higher by cooperating at 50%.
It really is very similar to a cartel, except that the mechanism for higher profits is different. The way the cartel falls apart is the same; The defector gains profit for itself by capturing a larger market share.
I'm sorry, and I hoped it wouldn't have to come to this, but I give up. This discussion is not going anywhere. You keep making the same statements and I keep making the same refutations. The difference is that I've backed my claims with calculations. You didn't point out any problem in my calculation (the assumptions or one of the steps) and didn't provide a calculation of your own. You just object to the final conclusion without any regard to the derivation that led to it.
It seems you're trying to force classical game theory cases into fitting the situation we have here. You say you agree that "this isn't a prisoner's dilemma" but all of your statements are taken from the world of prisoner's dilemma. But they just don't fit, the game here is different, and you refuse to address or listen to the logic that demonstrates this.
You also make generic statements without clarifying under which situations they apply, whereas I've tried to map out how the situation will play out in varying circumstances.
To conclude this line of discussion, I'll restate my thoughts on the matter:
1. If we assume that the hashrate distribution and difficulty are static, big miners will create supersized blocks because they know they'll reclaim some of the fee themselves. This is a Nash equilibrium and does not rely on any sort of collaboration or reciprocity. This will shift the balance we tried to achieve with the cap in the first place, allowing more txs into blocks than what would happen without this effect, and giving slightly more profit to big miners and much more profit to small miners.
2. In practice, the assumption above is not realistic; miners know that if they create supersized blocks, they will make mining more attractive, thus attracting more miners, thus increasing the difficulty, thus reducing their profits. So longer-term it is actually not beneficial for them to do this. So in all likelihood, big miners will not create supersized blocks, and all miners will get the same reward per block, without any superlinear advantage. Because of this, the original objection that the method in the OP encourages centralization of mining, has been refuted.