it is probable that the dwarves didnt know what the balrog was. in fact, it is probable that nobody except the istari knew what it was!
since a balrog was originally a maia, (thus being equal in power to gandalf, another maia) and nobody knew about the maia because they lved so far away in valinor, they didnt know what it was. dragon resistant armor would probably have bees useless, a maia would be more powerful than a dragon.
so maybe they kept on fighting until they were nearly wiped out, not knowing that
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this is a foe beyond any of you
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