Google doesn't have complete discretion. On Samsung phones, Samsung's discretion overrides Google's. On Xiaomi phones, Xiaomi's discretion overrides Google's.
Google has essentially full control. Because they own security updates. Because banking apps already now often do not work without Google services. Etc. Etc.
It is a monopoly (regarding Android app developers), and is increasingly exploiting that to cash in.
They already have agreements for it anyway.
Is this wrong? Sure they have agreements but does it include "don't sell phones with alternative ROMs"? It's licensed software and I don't think the phone makers want to end up on the wrong side of a Google lawsuit.