If you've ever played Nintendo's Ice Hockey (1988), it's super realistic, and the tradeoffs of big vs little are clear: little guys bounce off of big guys and big guys move slow.
My kid is in 12U youth hockey and is a big guy, and yeah, smaller kids can often usually skate around him, but if they bump into him, they fall over, and often he'll get a "big kid penalty" which means he gets a break in the penalty box for the crime of being tall and physically near a smaller player who fell over. We had to do a bit of coaching on how to make (allowed) physical contact so it reasonable contact doesn't look like prohibited contact (mostly be sure to have hands off when kids are falling, it's real easy to look like cross checking when it was actually just incidental contact).
Some of the littler kids seem to have a lot of fun getting away with a lot more physical play than he can. Although he says he enjoys it when a small kid gets mad at him and tries to knock him over, too. So at least so far, seems like everyone is having fun.
I don't think you can really just bucket kids by size and ignore age though... there's a lot of mental development between 10U hockey and 12U hockey, and putting a big 10 year old on the 12U team is often not right because the level of play is so much different, most 10 year olds won't keep up. At the same time, a small 12 year old on the 10U team is going to have a big advantage from age.
Around here we do have two different leagues, one for 'recreational' teams and one for 'reputation' teams, and you more or less have to demonstrate a decent amount of skill to get on the rep team, and then you're playing with much better teams. All the teams are composed of a mix of big and small kids though.
Edit to add: All that said, I think bucketing kids by age makes sense and I agree that there can be advantage to being at the extremes of the cohort. Since the US school system usually has a different cutoff date (september-ish) than US youth hockey (jan 1), you might see different results where there's grade level based high school hockey and age based youth hockey... but not in Canada where the cutoff is Jan 1 for both.