I would say the reason behind not having a higher resolution screen or a larger one would boil down to.... get this - Apple doesn't have too!
Before anyway gets upset and starts talking about their 5 year old monochrome displays, let me elaborate. The iPhone doesn't have real competition at the moment. The Pre is darn near close and I think after a few patches it'll be a great device and give the "extra push" for Apple to take a bigger step in the next model.
I believe the next model will hav an OLED screen, but at the same screen size. They'll probably bump the size and resolution in the following model (2011). You can disagree with me here, that's fine; I can garauntee you will not see a lot of things upgraded at one time in the near future. Apple will continue to bump a few things here and there in each model. Every two years you get a big bump compared to what you have versus smaller bumps every year.
Screen resolution is independant of apps, Apple has said for a long time not to code/design your apps for any specific resoultion. Apps, if designed in a way that Apple recommends will scale just fine; hardware on the other hand is a bit different. You will see distinctions in what can and cannot play on certain models depending on processor, internal memoery (not storage), and the graphics chip.
Next year, I can see the iPhone using the same processor as the 3GS, unless another phone maker that Apple considers its competition announces the use of a better processor. It's possible the rumors about a multi-core could reach the iPhone next year. We simply don't know.
All-in-all we will see bumps in specs year over year, the idea is not to have a groundbreaking iPhone to buy every year. It's to convince those that are eligible to upgrade every 18-24 months - this new model is leaps and bounds better than your 2 year old iPhone; slighly better than the 1 year old iPhone.
For example:
Take the 1st Gen iPhone upgrade to the 3G model. It ws a small bump in specs. The idea wasn't to get all of the original iPhone owners to upgrade, but to open the door to get everyone on the iPhone bandwagon.
Yes, a lot of 1st Gen owners upgraded, it's a bonus. Different case design, adding 3G and gps is a small bump in specs.
Now you take the 3g upgrade to the 3GS, I consider this a medium sized bump. Adding a compass, video recording with autofocus, 3 megapixel camera with autofocus and touch focus, (activated) Nike+ support, New & faster processor, more internal memory and more storage. The only thing this is missing for me to call this a big upgrade would have been a better screen.
The upgrade from the 1st gen to the 3GS is HUGE! There's no ifs, ands, buts about it. This is how I see Apple moving forward. A certain number of people will get the new iPhone every year - regardless.
I think Apple wants to give you a big bump in specs every two years to convince you to upgrade.