I've seen DL sell upgrades but only after all medallions have cleared. OP, are you sure you were on the upgrade list? If you saw a non-status traveler paying for an upgrade, why didn't you tell the agent that you're a DM and should have your upgrade processed first?

Edit: Or is the OP complaining that he got upgraded as a DM and complains that after he and all medallions were upgraded, a non-status pax upgraded for $125? Because if that, then . You got a $125 upgrade for free. There's your benefit.

This isn't FCM -- FCM prices out medallions from upgrades by selling F for relatively cheap before upgrade windows open/upgrade inventory is opened. What happened to the OP is SOP for when there are more F seats than F tickets + elites. I'm glad DL does this, it adds to their revenue stream without actually have to pay more to provide much service. It doesn't dilute medallion benefits at all, since you've already been upgraded by the time these seats are being sold.