I don't care that it's commonplace to just renew the contracts with no regard to merit, I believe coaches have that right not to renew them with a valid reason. And not being as good as advertised is one. If they can better their team, that's enough of a reason to me. The coaches at the end of the day are evaluated on wins and losses.
And again, that's largely on the coach if the player is not good as advertised, at least assuming it's not a work ethic issue.
You're right that it can be the right move in terms of trying to win games; although, it can effect recruiting if it becomes commonplace. I just don't think it's ethical and I don't see much justification for doing it with the two specific players mentioned.