Thanks for the welcome, GarryP!
On the Mac I replicated the behavior you demonstrated as well. The Chapter 3 paragraph style was set to start on a new page, so I suppose deleting that paragraph break removes that page break. But it is hard to figure out what else is happening there - more text goes missing - specifically, what were the 3.0 and 3.0.0 sections and most of their subordinate body text.
One thing I notice is that the amount of text that goes missing seems to comprise about the same amount of space occupied vertically by the picture frame rectangle that the text is supposed to flow around. But I can't figure out where that missing text is going.
What I am getting from your post is that I (as a newbie to Publisher) am not "doing something wrong" or mistaken about my expectation that the text should flow correctly around this picture frame rectangle.
This issue is right now blocking me from using Publisher in any serious manner. Back to InDesign for the time being I guess.