@OP, I agree with your argument. As per game theory and the assumptions you have made, I don't see a reason why the block size limit has to stay at 1 MB.
Newbie question here, is there any way to change the block size limit? How feasible it is to do? Would it require a hard fork?
Well, that's why there is a current "civil war" within the Bitcoin community because of this. There are groups that want to scale Bitcoin and others just want to stay in place. Again, that's why the forks of Bitcoin Cash and Bitcoin Gold happened and I believe there are more to come or happened already.
BCH has an 8MB block size limit if you're looking for one with a bigger block size.