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In "Game Options" menu before actually setting a game up, there is a 'Fleet Size' option. After setting it to low, and going into a game, I noticed I can still go up to maximum fleet size. What does this change if not the amount of ships people are allowed?
it merely changes the maximum fleet size
ex. low 1500, reg 2000, high 2500
The number of ships at each level changes. This means you need to purchase more upgrades (and go to higher upkeep) to get the same number of ships when the fleet level is set to low. Similarly if the fleet level is set to high you don't need to go as high into upkeep.
Often times people play with small fleets on big maps, since things can lag up late game once economies get big. People will similarly play with large fleets on small maps, since you don't have as much money to waste on upkeep in these scenarios, and this allows you to get bigger fleets with less upkeep.
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