Some of the comments here I find pretty scary. There is an air of holier-than-thou and cockiness in some of the posts that is downright unsettling.
I also wonder if people even understand how most businesses operate. A brick-n-mortar store (of any kind) has a lot more hoops to go through than people give them credit for. It's not a simple buy item X for $1 and sell it for $2 in the store.
First you have to carry a huge variety of stock in a bike shop. You need a good variety of bikes, each with different sizes and component packages as well as different price points. You need "bling" products that people are going to buy to upgrade their bike. You may need road, mountain, and bmx parts in different sizes and eras that rely on different ways to be installed. You generally need to carry a line of clothing, helmets, gloves, etc that is going to be varied enough in color, design, sizes and price points as well.
On the repair side you need to try to carry as much as you can in parts that will fit anything from early 1900 bikes to modern carbon and titanium dream machines. The list goes on and on.
Many of the companies that put out these products are concerned about their bottom line first. They require shops to only carry certain types or risk being expelled from the product line. They require shops to order a certain amount of product, often more than the budget of the shop can comfortably handle.
That's just the tip of the iceberg..and we're only talking about merchandise in the store.
Then we move on to more costs. The shop has to rent/buy a place to operate out of. They have to pay for utilities just to operate. They have to shell out for business licenses, taxes, etc. They have to hire a crew to man their store and work the sales and mechanical issues. Again, I could go on.
Just at a simple level, we're looking at Merchandise cost + building costs + license/misc costs + labor costs. The only thing being subtracted from these costs are sales (whether product or labor). Most bike shops go through various stages throughout the year. Winter can be a very rough month in terms of product and mechanical labor sales. Spring brings in a rush of sales that slow down to very little again come the late fall/winter. Even when sales are low, they still have costs to pay in things like labor and building fees.
The end result is a very sad margin when it comes down to it. To help try to increase or get some profit, they have to keep costs lower. This often is going to be done by labor of their workforce. They are forced to pay lower wages to make a living, making skilled personal less likely to stay for long. They are also going to cut hours in the rougher months, meaning even more of those skilled personal who have mouths to feed are tempted to do another line of work.
During all of this, they have to also compete against other LBS and a variety of stores (Wal-Mart, etc) as well as the online competitors. People that get wrapped around the cheaper online prices or Wal-Mart prices go there instead of the LBS. If the LBS has (example only) $2000 in costs, he needs to sell $2000 just to break even. When everyone frequents his shop, he can sell 2000 water bottles for $2 (cost of $1) to make his cost payments. When only half the people frequent his shop, he sells 1000 water bottles.
If he were to sell them for $2 he's losing $1000 already of what he needs to make. Instead, he's going to need to increase the price of the bottles to settle his debts. On top of that, the distributer he buys the water bottles from also needs to make their money. They bump their prices to $1.50 a bottle or such to make up the loss of not selling as many water bottles to the LBS. That forces the LBS to bump up their prices even more.
You and I then go into the shop to buy a water bottle. We see the new price of $4 for the water bottle and say screw that, I'll just go online and buy the bottle for $1.50 (internet dealers are going to have a lot less in overhead and a wider market to sell). That means the water bottle sales the LBS does just dropped again from 1000 to 998, forcing higher prices again. It's a cruel circle.
Eventually, shops that don't get enough business go down. Way to stick it to the man, guys.