Everything you said, including the following, is true:
said by starbolin:Dropping packets only increases congestion. Every thing from the client to you has already spent cycles processing the packet. Now the packet has to be retransmitted. So what you end up accomplishing is increasing the load on downstream links in proportion to the percentage packets that you drop.
Yes, the traffic on the overall swarm is increased and the throughput on the overall swarm is reduced. However, the traffic on the congested segment is relieved. The retransmit is delayed by a random delay interval which is again doubled on each retransmit. That way, the pressure on that segment rapidly backs off. This behavior is quite desirable.
BitTorrent takes it a step further by ending the transfer to a peer or peers using the congested link, and trying a different peer from the list.