Newspapers used to be much bigger than they are today. Try to find one in an antique store; they were enormous. The standard format was eight columns of type in a 15" width. Today most use six columns while some use five slightly wider ones. That’s because most papers have gone down in size to lessen paper costs and to accommodate newer printing presses that do color. My local paper is 11" wide, but the New York Times is a full 12".
It’s true that tabloids were designed to be read in cramped spaces like subways and also true that they almost always targeted a blue collar audience, while the elite papers stayed with the larger size. That meant that tabloids were limited to the very few major cities that had subways, though. The vast majority of cities after the 1920s had just two or three papers and they were all regular newspaper format. Home delivery became more important as well. Few people seemed to think that a large paper was a problem at home. The percentage of the country that was in the middle class soared after 1950 so there was little incentive to go after the shrinking blue collar market.
But the overwhelmingly important reason was that the larger size was preferred by advertisers. A full page ad was a powerful display tool. Department stores, furniture stores, movies, automobile companies, supermarkets all took out regular full page and multi-page ads in the broadsheets. Almost all newspaper revenue came from this advertising (and the classifieds) so the preferences of the readers were secondary. The more advertising, the larger the newspaper. Newspapers don’t want people to see nothing but pages after pages of ads so they put in news articles around all the ads that don’t fill up whole pages, i.e. the majority. Newspapers grew very fat with advertising and so got fatter overall. That again favored the broadsheets, since hugely fat tabloids lessened the ease of reading which was their selling point.