Personally, I've been too intimidated to ask my LHS owner to display something in his case, even though I have a few models that are as good as if not better than some of the ones he has currently. I don't know whether or not he remembers me, or cares to, but I've been frequenting his shop for a while, so I'd assume that if I asked, he'd say yes.
On to your question. Personally, from a business perspective, I could understand it, but basic manners would suggest that he'd at least consider it. Were it my store, I could care less whether or not it was purchased there. Would you if it were your store? Be honest! I think that most store owners would be wise to hawk their own wares, and as such, as said before, I could understand it.
But to reiterate once again, were it MY store, I could really care less. Also, if you've been there on a regular basis, let's say at least once a month for a year or longer, and they still don't consider you a familiar enough customer....well, damn, that's just one paranoid store owner I guess then