So if women are saying smaller men are just as satisfying, why does having a smaller cock give men such strong feelings of inadequacy?
Because men are built to penetrate physically and to conquer psychologically. It is in our nature to do so. We equate the two. Therefore in our minds the bigger the dick, the greater the penetration, the greater the pleasure, the greater the conquest. Penis=power=pleasure. If we equate them then we think that the guy with the bigger penis can provide more pleasure. And providing pleasure to our woman is what our manhood revolves around. Fear of failure is what humiliates us.
What we miss though is that women have a different perspective. For example, the in-out that we like so much doesn't provide the optimum friction on the most sensitive spots. Once you understand female sexual anatomy generally and as individualized to the actual flesh and blood woman you are with they teach us and, ideally, we learn.
A big dick may hit more spots and therefore make friction easier in general, but whether it is pleasurable depends, as always, on the lady. The importance we attach to big dicks is not generally as pronounced in the female community.
That's why kindness, interest in her pleasure, learning what works for her and caring about her in more ways than just sexually will turn you into a better lover than some generic guy who has X inches more than you do. Obviously each woman is different, and some may place a premium on big dicks. Most, however, do not, as I understand it, outside of porn sites and enlargement ads.
My comments deal with average sizes. As to how small is "too small" I don't know. At some point there will be a problem with PIV sex if there is not enough friction. That is something only a woman can answer. But so far as the male perspective is concerned and your question, I think what I mentioned above is what is going on.