1) Why bother withholding the transactions if they're free?
The other miners wouldn't process them any way (when coin rewards are near 0).
Maybe they would and maybe they wouldn't. Miners currently process zero fee transactions. Why would they stop just because "coin rewards" are near zero?
"there will probably always be nodes willing to process transactions for free" - Satoshi Nakamoto
Whether they accept them or not is irrelevant. The relevant point is they won't receive any fees for those transactions. As the cartel grows, then more and more of the transactions will either be withheld from the other miners or sent to them with 0 fees offered.
At some level, those other miners go bankrupt.
The cartel starving them of a portion of their revenue yet they still need to produce the ENTIRE difficulty of hashrate because the cartel is paying their own miners from either the non-free transaction fees and/or from profits of being a cartel. Cartels gain more size and thus economies-of-scale efficiency as well they can charge higher prices once they have eliminated the competition.
Nope. This is where your theory falls apart. Out-of-band transactions exist, and they exist because fee-less transactions are permitted. The cartel can't grow, because it needs to have a dominate position among miners to start with. It can't happen. Currently, the bitcoin network is more than a 1000 times faster than the fastest unclassified supercomputer on Earth. It would take nation-state level resources for Amazon to even match one of the top 10 mining pools, and they would have to commit those resources to this end for an indefinate period of time. Even the NSA couldn't pull this one off, and they tried it more than a year ago. You can't bankrupt the independent miners, there is simply no way to undercut the guy who's mining rig heats his flat.
The effect is still to withhold fees and revenue from the other miners.
And to greatly delay your transactions.
I refuted that already upthread. Why can't you read the thread carefully?
You refuted nothing of the sort. What you are describing is an intentional network split, although asyncronous. The small side of the split always loses, there is no exceptions. No cartel would be willing to commit the resources to acheive this end, because it would be a money pit until they hit 51% of the hashing. Over 58,000 Petaflops. The fastest supercomputer on Earth is 33 Petaflops. And that is
now, what will it be in 20 years?
The cartel can give 0-confirmation transactions to its customers, because these are going to be repeat customers because the cartel covers so much commerce.
Everyone can give 0-confirm transactions to their customers. That's a question of business risk, not capacity. It happens now. Please search for the fast-transaction problem and/or the vending machine problem.
Only the non-cartel transactions get delayed, because the cartels miners won't include them when they win the blocks sometimes.
That happens now. No mystery there either.