"Is the presumption then that natural market forces (ie, not regulations from governmental forces) will prevent the employers from either colluding against employees or from buying each other out? "
The presumption is that due to differing currencies between markets, with such small governments, there will be natural monopolies or oligarchies of single industrymen and maybe an apprentice or two. And that the control will be social- you are not likely to cheat a neighbor that you have to continue to live with.
" It would seem that you would eventually end up with markets where > 90% of the population is involved in food production or trades that exist to aid in the same. To me that seems to operate counter to the types of gains in efficiency that we have tended to celebrate in the past century or so."
Yes, and that's the point. Efficiency reduces the number of jobs available drastically, and centralizes ownership of first level maslow industries such as food, shelter, clothing. This is a great thing for the few centralized aristocrats, but a negative thing for consumers and workers.