You can come up with any amount of theories or excuses, but at the end of the day I'd say it's simply because dwarves aren't conventionally attractive and people tend to be shallow in their pretendy funtimes - it's fantasy and wish-fullfillment, after all. It's not just dwarves that get this treatment, either; if there's a bunch of races offered and one of them is decidedly "uglier" than the others without something really awesome to make up for it (ugly, demonic characters seem to get a pass more often than not, for example) they're most often the least picked. One example off the top of my head would be the Goron race in LoZ. People opt to go for Hylians, Twili, Zora and Sheikahs far more often than the Gorons.

You can also see this when it comes to people picking pictures for their characters. Really, how often can you claim to have seen an "ugly" PB?

I also agree with the point above; if you're playing a trope-defying dwarf (which is fun) it's because you already wanted to play a dwarf to some extent. You wouldn't even bother otherwise.