In addition to the other points that have been raised - Office is expensive! True, Apple's hardware also tends to be pretty expensive, but when you can buy a new iPad for $400 (or MacBook for $900) that'll last several years, an extra $50-$100 per year for Office 365 is a significant addition. Even on more expensive hardware, that's likely the most expensive software purchase most users will ever make... which means that rational or no, some users will shy away from it... and they'd be stuck without an office suite. In comparison, iWork used to cost ($80 back in the days of iWork '09, later $5-10 per app for the rewrites) but has been free for a while now.

Google Docs is free, but as a browser-based interface it's slow and nowhere near the kind of native experience Apple likes to promote; it requires an internet connection on anything but Chrome; it will never be a poster child for the latest macOS features like trackpad-pinch-to-zoom or Versions or the share sheet or whatever. That's on the desktop; on iOS, Google has a set of native apps but they're quite feature-limited.

Also, both Word and Google Docs are owned by companies that directly compete with Apple, and the apps promote the respective company's ecosystem (e.g. for storage, they push you to OneDrive and Google Drive respectively rather than iCloud). For better or worse, Apple wants to control the whole experience and make it all seamless. Not to mention that Apple probably wants to avoid situations where in the future it could be held hostage to some extent by the owner of a 'must-have' app for its platform.

There are less popular alternatives, but they all have their own problems.

Personally, I neither need to open people's Word documents nor have particularly strenuous requirements for a word processor or spreadsheet (or presentation software, but I'm pretty sure Keynote has some fairly decent pluses compared to PowerPoint anyway). So I am quite satisfied by iWork.