I think some of it has to do with aircraft & engine design in the past ~20 years or so - newer versions of the 737, etc can fly further than they used to, so airlines can put those on routes that were served by widebody jets. In the airlines' view, it means flying with less empty seats which is good for them. Sometimes this also means more frequency on a route, which can be good for passengers (e.g. 4 narrowbody flights per day instead of 1-2 widebody flights). That being said, I do enjoy the few occasions I get to fly a domestic leg on a widebody jet!

(Also bigger planes don't always mean better seats either, at least in Y. The Delta E-170/5 seats often feel wider and have more seat pitch than the 757 seats!)