I'm a bit late to the table, but here's some thoughts:
Debating about how the dragon stalks the party is moot. We're not here to do an audit on what events led up to the encounter. The dragon is high level, it had means to keep track of the party, and identify the optimal time to attack.
Debating about what happened to the PCs after they died is moot. The problem the OP has is how the party came to decide to fight to the death. They had no knowledge of what would happen after they died, and was irrelevant to the decision making process (point of fact, the party may have thought they'd be raised). But in any event, whether the dragon did or could have fully destroyed them (ex. with a disintegrate) isn't a factor in what happened DURING the encounter.
Now to the problem at hand, how did the players get to the point they decided to fight to the death.
Did they thinking running was valid (a "fair" encounter should include a viable escape route)?
Did they think the surrender terms would be honored (a lot of players don't trust surrender)?
Were they attached to their PCs (were they vested in them)?
Did they think they had a chance of winning?
Ultimately, I think each GM should have a campaign guide. That guide should include the meta-game parameters that you run with. Things I think the players need to realize are:
some encounters are not winnable through combat
sometimes the PCs will have to run
the DM is not out to kill PCs, though it can happen
Surrendering is a valid tactic and will be honored by most foes
Retreat is a valid tactic, and encounters will be planned to allow it
The DM will avoid "humiliating" a PC when it is not warranted (you don't need naked prisoners to have a chain gang of prisoners)
Part of good storytelling involves setbacks, the players can't win every encounter
The end goal is for PC advancement and success, and the campaign is intended to end that way, assuming good choices by the players.
The campaign is not intended to keep the PCs down the entire time.
The point then, if this is you're agreed upon playstyle, to run the game true to that form.