"You also have to consider that the market price is artificially inflated to "cover the damage" of piracy. Thus, if there was no piracy, the prices would (hypothetically) be lower. "
This isn't necessarily true if a competitive market isn't in place. Goods sold under a monopoly regime are typically more highly priced. In this case, piracy and counterfeiting introduce competition into the market, so hypothetically, if there was no piracy, prices would be higher.
Your argument holds well enough for fake Gucci bags or Rolex watches, but not so well for creative works, which are monopolies in the economic sense due to their treatment under copyright and patent law.