But the point was that is not a stable equilibrium because the profits are not accruing proportional to hashrate due to unequal propagation or orphan rates (i.e. wasting more hashrate). Thus over time the hashrate concentrates until there is a 33 - 50% attack and then eventually the cartel can set any block size it wants with a 50% attack.
While it's true that bigger hashrates and better network connectivity might result in centralization (eventually leading to a 33% or 50% concentration), the problem of proportionality isn't specific to the question of unlimited block size or the fee market in general. It also occurs for block rewards (
https://blog.ethereum.org/2014/07/11/toward-a-12-second-block-time).
Optionally larger blocks make effects of the disproportionality greater, because those with relative advantages in proportionality can make the larger blocks. As a miner I can start mining on my large block immediately, so why not make it really large. We already discussed that the risk of increase in orphan rate does not offset increase in revenue from doing so.
I don't want re-discuss everything @dinofelis and I already discussed.
Block chain tech is complex. I don't want to write a book.