I dont think smaller poker rooms necessarily have weaker competition, I play PLO at PS and if you play the micro games there and at FT you will see some terrible play, same with the small buy in sit n go's, same with NL, as you go up the stakes of course the play gets better.
But my fav site is miniscule, on a good day there are 40 players on there but there are very few fish amongst them, they are mainly decent players.
Having said that I also play on a site on the Microgaming network which has very low traffic and I dont think there is a decent player on the whole site, they are terrible.
Tu sum up I would say as a generalisation there are good players and bad players on all
sites but I think you would notice them more on smaller sites because there are less players to hide among, whereas amongst 50.000 players on PS they are not as obvious.
I may be completely wrong but this is now I see it