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I agree in that I don't believe it to be common practice. You're then essentially selling a VPS as a Dedicated Server. False advertising and obviously unethical.
Sometimes hosts sell these services under slightly different names. Such as "virtual dedicated".
For those that provide managed services I can see how they may be able to get away with this. Often times those requiring fully managed services aren't technically inclined enough to know that they're not on a "real" dedicated server.
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