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This is a difference between html and xhtml. Blockquote is a semantic element and is used to enclose something that was quoted. (It allows citing the source for example) It is not intended to be used to style as block elements are but html based browser code will interpret it as if it were html and style based on it. In html blockquote was often under a parent paragraph and inherited css accordingly from a p element, not the other way around. This difference in semantic vs. block elements is why it is behaving the way it is. You might find a ePub 3 compatible engine that would use it the way it was designed.
Dale
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