Gavin



This is a great question. I do not think you are being an idiot nor is there a page in an economic textbook which should explain this.



You asked about the profit maximising strategy, in order to know this we would need also make some assumptions about costs. In particular the marginal costs, which means the addition to total cost of adding an extra transaction into your block. In a competitive environment micro economic theory suggests that miners will keep adding transactions to the block up to the point until the transaction fee equals the marginal cost.



The marginal cost would exclude things like rent, hardware, salaries or electricity. It would only include costs directly related to adding extra transactions in the block. This may be mostly orphan risk cost. The size of the block would therefore depend on fees and orphan risk. Please note this assumes a competitive environment.



I don't think the distribution of block finding time may matter, miners may try to maximise profit if they find a block. I could be wrong here. If this does matter it is certainly not standard economic theory. I think orphan risk costs may be impacted by the poisson process, but this is complex and I do not understand how the poisson process would impact orphan risk.



"Include all transactions all the time isn't the optimal strategy, because all of those "A" people who are willing to pay $1 would instead pay whatever the minimum spam fee is."



This is a very interesting point and its validity depends on the level of competition in the industry and the time horizons of the miners. Please see two examples below:



1. If a miner has a 0.1% market share and short time horizon you may be wrong here, this miner may only care about maximising revenue in the next block, they may never find another block again and from their point of view they could exit the industry tomorrow. Economists call this "perfect competition".



2. If a miner has a 20% market share and cares about the long term, your logic is likely to be correct. The miner may not include the C transactions otherwise they may not get A fees in the future. Economists call this "monopolistic" behaviour.



The industry will always contain a variety of miners with different market shares and different time horizons, these balances are likely to change in economic cycles, sometimes miners will act in line with "large blocker" assumptions and sometimes "small blocker" assumptions. This is why this issue is challenging and we must be open minded and act with a reasonable degree of caution.



Of course we would like the mining industry to be highly distributed and competitive, so in some ways we hope the "small blocker" include all transactions logic is most applicable.







Many thanks