In purely unregulated fields like web hosting, there are tens of thousands of competitors because it's easy to create one. It's true that someone could go around buying up a bunch of them (and companies have done this), but even after they're done there are still thousands of competitors remaining. If a regulatory agency wrote couple thousand pages of rules for web hosts, many existing owners would probably sell their companies rather than embark of the emotionally draining task of trying to make sense of those rules.
Ironically, as the number of competitors declines, the ones that remain will feel more free to abuse both employees and customers. This will lead to demands for more regulation, which reduces the number of competitors further, and so on it goes.
I don't have a good mental model for why excluding all firms under, say, $1M would have a different consolidation pattern from including everyone, but it's not totally unreasonable to assume something simple like starting with drastically fewer companies will end with fewer companies as well (that consolidation is monotonic). There might be some nice explanation for that difference.
If regulation is what stops competition from forming, but the regulation is required for safety reasons, it makes logical sense to assist new competition into the market. This assistance should be limited to helping the startup be certified, etc, in such as way as to eliminate the barrier to entry resulting from the regulation (but not more - i.e., startups aren't getting extra help beyond that, so as not to artificially subsidize them but not their larger counterparts).
Sounds like it would create some inappropriate incentives for lawyers and others assisting with certification...
But generally I agree with the sentiment of the idea. Just not sure how to deal with further layers of problems.
Perhaps one step would be to stop thinking of corporations are superpersons, deserving of superrights. Instead, we could charter corporations and stipulate that they serve the public good.
Consequently, in heavily regulated industries, it's more efficient for extremely large firms to design and implement the necessary internal gymnastics, and amortize that labor cost over a large amount of business.
Smaller firms still have to do much of the same (at some point, 1 person is the minimum in a role), but can't spread it over as large a customer base.
Or, to put it another way, it's easier to merge your way into larger profit margins in heavily regulated spaces.