I would love to find out who the LDS is and what they had to say. To be perfectly honest, I just find it hard to believe that the owner of a dive shop would actually tell any customer that if they didn't buy just from them they would be banned from the shop and they would double the costs of classes. Just doesn't add up.
I don't mean to be snarky, but you haven't been around. This actually became a somewhat popular business model with the rise in internet sales. Dive shops became frustrated because they were using training as a loss leader to get students in the door to buy gear. Trouble was students would show up with uncle Harry's old turtle fins, aunt Mabel's purge mask, and 4 rocks dangling off of a piece of rope for weights. The instructor has to deal with lots of different systems and teach many methods rather than cookbooking an open water class. Remember, many instructors are those keen divers with 100 dives and a 10 day $1,000 class under their belts. and 84 of those dives are in a quarry somewhere. They have little real world experience, and none with gear their shop doesn't sell.
I'm going to say around 2003 or 2004 either PADI or SSI told their shop owners that they would sell more gear if they required the students to buy it in house. I have good friends that own one shop that charge $1150 for an open water class. There is nothing more to buy, ever. You may have your pick of the mask, snork, and fins, weights (soft or hard), belt, bag, academic materials, and mouthpiece. Rentals are included as are pool and open water fees. It's very popular with the country club crowd, which is where they do their pool work. Another shop in the same town charges $99 for the open water course, then requires you to buy all of the above at MARP. They raise the tuition fee for the class by the average amount that say, fins cost if the student want's to use Uncle Harry's old turtle fins. Both shops are successful.
I am a believer in method 1. Many are not. I run my boat that way. When you come on board for a sport diving trip, there is nothing more to buy. I include your nitrox, tank rental, weights, beer, wine, food, soda, and I even pay my crew a living wage so you aren't forced to. (They still like their tips, but don't rely on them). My partners in Texas like method 2. Your ride to the dive site doesn't include nitrox, or beer/wine/soda, or (in some cases) a paid crew. If you don't drink beer or breath nitrox, you'll save 50 bucks by diving on my partners boat. It's all in what experience you want.
Sorry for the mini hijack, but the point is that there are many dive shops out there that cut tuition to get you in the door to buy gear.