It’s the law of diminishing returns. Higher fares cause the budget traveler to rethink his plans and fewer seats get filled. Also, some of the planes being flown now lose money at current fuel prices even if they fly full.
This is why some airlines like Continental and United are grounding their 737-300's. United is getting rid of all their 737's, because all their newer planes for that size and mission are A320's and A319's. Continental is keeping its Next Generation 737's, the 700, 800, 900, and 900ER which they bought instead of switching to the Airbus A320 series.