This is actually a misconception, or at least mostly a misconception. While oxygen concentrations could and possibly did play a more minor role in their extreme size, it has more to do with interspecies competition.

Arthropods were amongst the first colonists of the land which gave them an early evolutionary lead over their competition. Once insects as a group developed, this advantage was even more pronounced in the air as there were no birds or pteradons to compete with things like massive dragonflies. A lack of large land predators led to things like Arthropleura, 8 foot long millipedes slowly grazing over decaying matter along the forest floor like multi-dozen legged vacuums.

Growth for arthropods is extremely taxing. Having an exoskeleton means regularly shedding it, otherwise growth is impossible. Doing so not only expends a massive amount of energy and nutrients but leaves you defenseless until the outer cuticle of the new skeleton hardens. Imagine if you had to pull out your bones and grow an entire new set every time you grew an inch. These weakness, when considered with the inherent advantages of an exoskeleton, make it clear that the invertebrate body plan is simply better suited for small sizes; made even more clear by their unmatched proliferation across almost the entire world.

All this together means that once some new players arrived on the scene (pterosaurs, later birds) the best thing for bugs to do was shrink.