AA wouldn't know it was oversold a week before the flight.
They might know that it is overbooked, but I don't see how they would know it is oversold.

While many of us might book extra segments to maximize mileage, I think most of the flying public does it because available fares with added segments are often lower than nonstops. So, for some people, an offer of paying less for the nonstop than they would have had to pay originally, might be beneficial to them. If I wanted the nonstop, and was offered it for $99 more, I would first try to negotiate the price. That fact that they made the offer probably indicates they have some other issue going on, and it isn't just about the $99.