Because it could be done really well. By repeating the same series of events eight times, the line between fiction and reality is blurred. Instead of being just an observer of the show, the viewer is also stuck in an endless recursion of time. It creates genuine empathy for the characters. We feel the same frustration Kyon feels when he fails to end the time loop so many times, and this just makes it that much more powerful and triumphant when he finally succeeds.
The repeating of scenes also makes you notice a lot more over the course of E8. There's a ton of nuance in the way characters interact in the arc that's never really shown in the spotlight, it's up to the viewer to catch onto it. From an analytical perspective, they picked the perfect episode to repeat: there's a lot to contemplate or examine in the episode because there's so much that's just left open or only hinted at, such as Koizumi's jealousy of Kyon, or more often, Yuki's suffering.
As for why KyoAni did it, one theory is that it was a sort of "tryout" for who would direct Disappearance: each episode was directed in a different way. This also made the whole arc a lot more interesting, with the animators and directors experimenting with various shots, motifs, lighting and shading in their episodes. The visual direction was superb if only for this reason.