I think that first point is certainly the most likely outcome. The market for low-effort fanfiction is gonna collapse fairly quickly, I think. But that's generally not something many folks've managed to build a career out of.

Also consider that there's already more fiction out there in the world than any human being could possibly read even in a dozen lifetimes. We don't need any more. So why don't we stop? Why is it, instead, that exponentially more fiction is being written today than at any other point in human history?

It's just what we do. The market may shift and change (as it ever does) but the practice? It's bedrock. Humans've been telling stories since the invention of speech (EDIT: which, honestly, probably predates the evolution of homo sapiens), we're not gonna suddenly want to stop telling them or hearing them any time soon.