First let's ask if they would behave this way with today's block subsidies (the other question is harder to answer).  

In order for the fee market to collapse (due to the propagation impedance falling to zero), no new information about the transactions included in the block may be transmitted during block-solution announcement.  But if no new information was transmitted, then the miners must have already come to consensus on the state of the ledger.  If that were case, then what purpose did mining the blocks fulfil?  

Haha but there's a better way to show that the fee market won't collapse even if you ignore the absurdity in the previous paragraph.  It goes like this:

1.  In order for the miners to know another miner's block contents before that lucky miner finds a proof-of-work, all miners must somehow agree to what the possible block contents are beforehand.  Since coming to this agreement cannot happen instantly, this means that the transactions included in the block must all be delayed by at least time T, where T is the consensus time.  The current block would never include a transaction that was announced only a second before the block was found, because the miners couldn't have come to pre-consensus on it.  In other words, if a miner included that new transaction it would mean that he'd have to transmit a non-zero amount of new information with his block solution announcement (he'd have to send the new TX as well), thereby violating the condition required for the fee market to collapse.    

2.  However, maybe that new transaction had a big juicy fee attached to it!  If miners are free to build blocks according to their own volition--and if miners are rational profit maximizing agents--then there should exist some fee that would entice the miner to include that brand new TX in the block he's working on even though doing so increases the amount of information he might have to send with his block solution announcement.  

3.  Lastly, if there are lots of transactions occurring on the network, then there will be a corresponding increase in the number of new TXs that pay decent fees that miners will want to immediately include in the blocks they're working on (i.e., they won't bother waiting for pre-consensus on some of those new TXs).  If rational miners make the decision to immediately include those TXs (and they would because it would earn them more money than by never included brand new transactions) then the block solution announcements will contain an amount of information that also depends roughly linearly on the transactional throughput of the network (i.e., on the avg block size)!  

TL/DR: A transaction fee market exists without a block size limit assuming miners act rationally.

Transaction fee's are bid to the minimum necessary to include them on the blockchain. This minimum does not magically include all miners, and would reach equilibrium, absent any artificial scarcity, at roughly the cheapest rate possible to achieve that end. That collection of rates would be enough to cover a single datacenter in an ideal location.
The only artificial scarcity in the system is the block size limit. With it, fees can be bid above that equilibrium and thereby fund redundancy of both nodes as well as hashpower.
Without it, nodes would atrophy toward that equilibrium (~1 node). Bitcoin would have failed long before that equilibrium would have been reached, not only because it would mean the goal of a decentralized currency would have failed, but also because hashpower would fall below what would be necessary to keep it secure.

If you're saying that even in that outrageously broken scenario that it would still cost money to add transactions to the block chain, yes you are right. Are you planning on actually addressing the real problems with removing the block size limit?

Greg Maxwell already addressed this incorrect idea that decentralization is protected because somehow information is better transmitted by being decentralized.


Bolded for emphasis. I would recommend reading the whole exchange.

http://pastebin.com/jFgkk8M3

No, it doesn't, that's the point. Centralized mining pools aren't at some disadvantage when it comes to throughput because of some perceived increased risk of orphaning.

I don't know why I wrote "mining pool", it doesn't matter if it's a pool or a big centralized mining entity of any other kind.

Fits the bill.

https://bt.irlbtc.com/view/1320095.msg13491777#msg13491777

If a fee market breaks down because miners are not acting rationally,
it seems that that could happen with or without a blocksize limit, and
generally to the same degree.

Example:  Assume a pool/farm with 20% hashing power that solves 1 out of every
five blocks and will include anyone's transaction regardless of fees,
this would cause a problem with a fee market regardless of whether
or not there was a blocksize limit.

although i suppose it would be worse with no limit, since everyone
would have room to get their transaction in , in the irrational miner's
block vs waiting longer.

Yes, probably a better explanation then mine.



The orphan based fee-market brakes down when miners act rationally. The incentive is to always reduce orphan rate and that can be done with 2 datacenters with big pipe between them utilising the methods Greg describes for sending blocks.

Its good to think about it and plan ahead.

If you think things are contentious now,
just imagine what would things be like
in 30 years with a huge ecosystem around
Bitcoin.