They still suffer from diseconomies of scale, but with the competition kept out of the market, their inefficiency doesn't limit their size. If not for the regulations raising the barriers to entry, they could never expand beyond their "ideal" size.
This right here is the crux of the problem with many regulations. Some regulations do not create this issue though.
I am not sure I understanding you correctly?
I agree that is the crux of the matter, however I don't understand your qualifier "Some regulations do not create this issue"
I question your assumption and would say that regulating the money supply and creating inflation, and providing solvency stimulus to keep inefficient oversized corporations viable is prissily the issue created by regulation of the money supply.