Because in the long term it is not working against their best interest. If I know that a store will not try to sell me stuff that is a poor match to my needs, then I know I can trust that store. When I go into a store that tells me to buy a piece of equipment that doesn't match my needs, or a T-shirt in a colour that looks terrible on me, I often find out later and tell my friends.
People rave about Apple downselling and Amazon allowing low score reviews on their products because in the long run its good business.
Please keep in mind though that it is a well known technique to try to build loyalty by doing something that the customer doesn't expect that isn't in your best interest.
The problem is this doesn't always work and isn't applicable in all situations.
The customer that you sell a laptop to may or may not return. But the salesman selling oracle would get fired for pushing a competitors product under the guise of building loyalty.
The problem is that practices like this are specific to certain places and situations.
Lastly, if you are a local small dealer you simply can't afford to easily lose a sale with the hope that the loyalty is paid back for years to come. You generally have to make hay while the sun shines.
As far as this thread goes, rednukleus did specifically say "high margin places". But yeah, it's just an often-overlooked angle on a (still) hard problem.
I'm not sure about your example of the local dealer. The "local" part implies to me that personal relationships and long memories will play a relatively large role in someone's business. It could be extremely beneficial to at least be seen as looking out for others to your detriment, and it would probably be easier to do for real than to fake convincingly for a long period unless your customers are ignorant.
People rave about Apple downselling and Amazon allowing low score reviews on their products because in the long run its good business.