As for where to submit it: Strange Horizons would probably be a good bet. Other than that, I'd look for any market with an interest in slipstream. You might be able to talk some litmags into it, too. I wouldn't worry about the title too much. Just write a cover letter categorizing it as "literary fiction."
(I would suggest Beneath Ceaseless Skies, since I know they're into literary fantasy, but I think they're mostly into adventure fantasy. I've only read their submissions page, though; I haven't actually read any of the stories (this makes me a bad person, I know) so I don't know how far they might be willing to stray from this.)
I didn't think the structure of the story was a problem, and I wouldn't change it. It might help to give an indication early on that this is a letter. It doesn't need to be some sort of "I pause with my pen over the paper" kind of statement, either--to be honest, I find those faintly annoying, especially if they exist ONLY to remind/tell the reader that this is a letter. What if you just formatted the story like a letter? You know, with a date and salutation (or whatever) at the top. After that, the conversational tone to the voice should be sufficient to remind the reader that this is supposed to be a letter, and then people won't be too startled by the end.
I don't think you need to make this "all letter" or "no letter" either. We know that we're supposed to be reading a letter; we also know that we're actually reading fiction. I think most readers will forgive the slippages into scene rather than letter--don't let format get in the way of storytelling.
The moralizing. To be honest, I didn't even notice this while reading, but having read the comments I do see where you're coming from. I don't think that it needs to go away necessarily (especially if, as Frog has already noted, you're going for a fairy-tale feel), and it makes sense from a story perspective that the dragon itself would be a moralizing figure. A little subtletly never hurts these things, though. Maybe you could make the questions that the dragon poses a little more open-ended? True, the narrator admits that he doesn't have an answer. But he's also said that he's at peace with his decisions, and well, it doesn't really
feel like a conflict anymore.
I don't think that the question of the ending should go away. I wonder if, instead of making it purely sentiment (where I don't mean that as a criticism, but it is a bit distant and philosophic) you could ground that same question in the narrator's reaction to seeing the dragon on Liza's shoulder (a reaction which we get almost nothing of). That might make it more emotive and immediate, and perhaps lessen the feelings that the ending is purely sentimental or moral.
(Hmm... maybe this is a letter meant mostly as a warning to Liza?)
Regarding what Frog said about showing versus telling: Well, I did
notice that there was a lot of telling/summary. I'm honestly not sure, though, that this is a flaw. For one thing, I didn't feel bored with the story at any point, and it is more true to the letter-writing format. I think you've picked your "scene" moments fairly well, though perhaps one or two more wouldn't hurt if you want to ramp up the more emotional moments a bit.
And let's face it--if you try to write this all as scene (aside from the fact that you'd almost certainly have to lose the letter format) it is going to balloon. This thing could easily be a novella at least, and I'm not sure that's what you want.
Hrmm. That was...less helpful than you were probably hoping for. Hope you get something out of all that, at least. Good luck!
