This is a rather old question, but I think that there are two important reasons not fully answered.
Firstly: the volume of the engine is in itself not relevant. The total of other factors such as the size and weight of the engine, the power output, reliability and the fuel effiency are what matters.
You could use smaller volume engines, in fact some are available. They run at a higher RPM and "gear" down to the propeller at a max around 2400 RPM (the tips of the propeller should stay below speed of sound). This might lead to a better total performance, say lower weight or better fuel economy, but may be offset by the higher complexity. As always, engineering is about compromises between different requirements.
Secondly: aviation engines is a very small market with a lot of regulations. If you compare to say cars, I would guess that total number of aviation engines sold in a year is less than one of the larger car manufacturers makes before lunch on a normal day. Add in that it takes a lot of paperwork to get the engine approved as replacements in older airplanes. This means that any new engine design faces a hefty upfront investment in order to gain a quite small payback in the short term, not a very good sell to capital investors.