Keeping seats available for possible paying passengers who appear at the last minute isn't the reason. That's why they won't confirm more than a limited number of upgrades ahead of time, but they have a waitlist to take care of anyone else who's willing to use miles/credits/whatever to move forward. They clear the waitlist at the gate once they've decided that no more paid customers will turn up.

A big part of the reason why AA doesn't give out free upgrades, except on full or nearly-full economy fares and then only to EXPs, is that it would take away a big incentive for high-status FFs to buy first-class tickets or upgrade with miles/points/etc.

I understand that according to the proposal an elite on a low fare would be near the bottom of the priority list, but as a practical matter I can nearly always tell in advance when F would be open enough to ensure me an upgrade on that basis. If I expect that to happen I'll just await the free upgrade instead of using some form of "currency" to "pay" for it. (If I guess wrong I can probably offer miles, or something else, at the gate and get it anyhow.) Multiply that by AA's flight frequency and the number of elites they have, and they'd be leaving millions (if not billions) of AAdvantage miles and mile-equivalents in people's hands that are now being used for upgrading.