pg_upgrade doesn't find config file
You know what they say about the word assume

I assumed the config dir and data dir was the same.

Answer 1:

Change your command to this and it will work.

sudo -u postgres /usr/lib/postgresql/10/bin/pg_upgrade \
-b /usr/lib/postgresql/9.6/bin -B /usr/lib/postgresql/10/bin \
-d /var/lib/postgresql/9.6/main/ -D /var/lib/postgresql/10/main/
-o 'config_file=/etc/postgresql/9.6/main/postgresql.conf' \
-O 'config_file=/etc/postgresql/10/main/postgresql.conf'


we can provide the special config file location as an option

Also, I believe you have identified a default install issue or the documentation needs to be updated

The default install should create the config files in the datadir 

Answer 2:

Since this is play, try this too:  

sudo -u postgres pg_dropcluster 10 main
sudo -u postgres pg_upgradecluster 9.6 main


Keeping this, since it might help someone else.

The empty databases seem to have not been created yet. Or are in a different directory. That's why postgresql.conf is not found in the error message.

ls -l /var/lib/postgresql/9.6/main/postgresql.conf /var/lib/postgresql/10/main/postgresql.conf 

should show two files.

The equivalent initdb command for both versions should be run

pg_ctl -D /var/lib/postgresql/9.6/main initdb

pg_ctl -D /var/lib/postgresql/10/main initdb