This focuses a lot on the production/offer side, but is there really all that much demand for the size of game advocated for? Aren't those publishers asking for bigger games because that's what the market is looking for?
From their perspective, because a big game is predicted to earn more, and because investment will chase higher returns, they have to say they'll go big to get any investors on board. The publishers that can stay small have to bootstrap, which makes them unattractive as sources of funding. It's not being driven by consumers that assume a production with 4000 people involved is strictly better than one with 3 people, it's the funnelling effect of all the money coming from more speculative sources that have no motive to consider industry health holistically - which is a macro-economic problem.
You can learn about the early days of this from Matt Barton's interview series with Robert Sirotek, particularly the last part[0]. Sir-Tech ran sustainably, by Robert's assessment, and consistently shipped smaller productions, but a shake-out occurred in the 90's. At first it was primarily coming from retailers who wanted things done their way to get a placement, squeezing out lower-cap players and imposing drop-dead ship dates on the developers. But it's reasserted itself a few times in a few different ways, since then, and is now pretty clearly tied to the industry being in a dilemma of either getting no investment, or endless amounts, with a promise of making 100x that, which ultimately reflects the decades-long asset bubble and increasing use of "free money" federal lending. If they don't promise those kinds of returns, someone else takes the funding.
So, the market is actually scrambling to figure out what to do with the investment tap cut off right now. Embracer Group, one of the biggest consolidators of the last cycle, reported troubling finances last quarter and has started closing studios. It's become a "lowering tide, see who swims naked" market.
> is there really all that much demand for the size of game advocated for?
Yes, people do buy and play small games.
> Aren't those publishers asking for bigger games because that's what the market is looking for?
Obviously, there is demand for big games because big games sell. But the publishers focusing on big games doesn't mean that there is only demand for big games. There are multiple reasons why publishers would not be interested in small games or small studios.
Where the big producers ARE totally not listening is monetization. But here again 'globally that work' and most (not all) customers see themselves as more 'moraly right' than they really are. Everyone is happy to bash f2p immoral economic system, but are glad to enjoy free games. They will all speak about how possessing your games is important, but will take gamepass anytime because it's less costly. (here again they are just pragmatic and nothing is wring with that).
A funny thing when you discuss and do post mortems with little game development studio, is that each time they try to avoid a notoriously 'shady' practice, first critics will be about them missing (mainly gamble/casino mechanics and timesink/grinding features) ^^