One of them is small enough to fit in your pocket. The other isn't. Often, shrinking the size of something makes it more expensive. It's debatable as to whether that equates to an additional $120 in value, but people seem to have no problem paying that amount. I doubt that the screen is $100 cheaper as well. If you're going to make that claim, at least link to a cost estimate for the BOM. From what I can find with a quick Google search it looks like around ~$50.
The problem is that no one is doing this so there's no pressure for other companies to respond in kind. I think that they all realize that they can squeeze a lot of extra money out of consumers this way so no one is in much of a hurry to change, especially the Android manufacturers who aren't making high margins. The extra profit from the flash storage is probably what allows them to stay in the game.
The other reason is that there might not be enough supply of NAND flash in the necessary sizes to make the jump to 32/64/128. Going from 16 to 32 might only cost an extra $10 or so, but the jump to get to $128 might cost a lot more if they want to use larger modules, which might not even be available in quantity.
Ever since the third generation iPad (which they called The New iPad) they've been really weird with the naming scheme. You're probably right that they might be releasing an even larger iPad in the future so they're just adjusting the name now to draw a comparison between their tablet and notebook lines. Maybe they'll even call the larger iPad the the "iPad Pro" or something like that.