Yes, this is with block rewards constant. Tail emission. But in the case of rewards proportional to block length (fees), you have to multiply A's revenues with the fact that his blocks bring in more money. He has a lower percentage of blocks on the chain, but these blocks bring him more rewards as they are bigger.
So if his big blocks bring him 20% more income per block, this is neutral.
Well, I'm not sure if we are on the same page.
Of course, you can include more transactions and collect more fees by building bigger blocks, but that doesn't solve the fundemental problem that A's fee revenues must be multipled by his blockchain production (fraction of the chain built by A), rather than by his rate of successful blocks (ratio of non-orphaned blocks).
Let me come back to my example of the three miners A, B and C, all with a hashrate of 1/3 and an orphan rate of 0.01.
Now, assume that A and B stick to a block size of 1mb, while C tries to find the block size that maximizes his profits.
C can do so by gradually increasing the block size as long as the higher orphan rate (resulting in a lower production share) is outweighed by the higher fees. As the orphan rate follows an exponential distribution and the marginal fee income tends to decrease, there will be an equilibrium where marginal revenue = marginal costs. Let's assume that C's profits are maximized with an orphan rate 0.2, so that his current blockchain production rate will be 0.288, while that of B and C 0.356 each.
The fundamental problem arises once A and B also start using a variable block size to maximize their profits. By doing so (i.e. by increasing their own block sizes) they will not only decrease their own blockchain production shares due to their higher orphan rates, but at the same time C's blockchain production share will grow and thus destroy his individual market equlibrium. To reach equilibrium again, C will now have to increase his block size once again to collect the same fees as before. So, his optimal orphan rate will be more than 0.2. This, in turn, would place A and B in a disequilibrium, who might then increase their block sizes even more, etc. It will all end up in a doom loop.
It seems that the increasing total block space supply combined with the (probably) finite demand for transactions could make the loop converge at some upper limit. However, this equilibrium would be unstable. When a miner suddenly decreases his block size, all the others would follow suit to reach their individual market equilibrium again. The miners might even end up at an unstable lower equilibrium point
As far as I can see, no stable market equilibrium can be reached by all miners at the same time. For mining market has the peculiarity that whenever a miner increases its own supply, the supply of all the other will decrease. In contrast to regular markets where the players only compete to meet the demand, Bitcoin miners also compete to increase their own supply
at the cost of their competitors since total block production remains capped even with unlimited block size.