A market is usually driven by what most people accept. If only a few complain, no one changes anything. How do most people listen to music today? They listen on the go, in public transport, on the street, in restaurants, everywhere and they typically use the music as a background for their daily life. They don't sit down in a quiet room and focus on nothing else but listening to music. And they do not analyze the files with some db tool. Given that typical consumer behavior compressed music is actually more suitable than high dynamic range music. Like it or not.
Certainly the market for people that care about quality, and who actually listen critically, is a pretty small group. But I have no problem listening to acceptably dynamic recordings in any of those situations. I use music as background material, too, after all. And I still don't think that those consumers that use their music
exclusively in those situations would notice or care about more dynamic recordings. So they don't really lose out on anything. And those of us that do care, gain. Thus my assertion that it would be a Pareto improvement (Some are better off, while none are worse off). Of course, if it increases cost for the producers (the labels) it won't happen, for the exact reasons you assert, until (and if) more people start to care.
EDIT: This has gotten me thinking, I was trained as a policy analyst (basically applied economics) but ended up in software (because I am mainly interested in national policy, and don't like DC) but if I ever completed my economics training with a PhD (which I've contemplated through the years - I only went through for a masters in Policy Analysis) I think I'd like to do some research on the audio market. I mean, it's really an interesting one to me, that's probably why I'm still here, and still play with DAPs and the like despite my belief that high fidelity sound is pretty well solved. Here's what I find interesting:
Market theory depends on a few assumptions (which are never all met - but in many markets we get to some reasonably close approximation). One of the things that breaks down perfect markets are information asymmetries. These occur when at least one party involved in a trade possess more (or better) information than the other(s). More or less. But the audio market might be the only example where it seems that both parties sometimes seem to go in blind, there are examples of producers making dumbfounding design choices, a couple examples are the plethora of DAP's designed with restrictively high output impedance - something that has gotten better, or a certain banned blogger and headphone amp designer that exposed companies that were seemingly completely unaware of major design problems in their own products. In these instances the producers, who presumably employed engineers, seemed blissfully unaware of the issues, and why they were issues. And consumers that purport to love higher fidelity, then go and buy products that distort sound and roll off treble. Things that can only be described as decreasing fidelity. While decrying things like EQ. I mean, it's a truly fun market to follow if you're in to that sort of thing.
I don't even know what my thesis would be, exactly, but I think you could do something really interesting with this market. I think that the producers have gotten savvier in the last few years, while the consumers haven't. So they look more like a traditional information asymmetry, though I do not doubt that many producers believe their outlandish claims.
I previously had thought that my thesis would be on the history of economic development and the impact of weather on it (until the advent of aircon, note the climates where the industry rose), but I think the audiophile market would be even more interesting to study, because it's happening right in front of us, and might actually be instructive of some weird market phenomenon. Anyhow, I've now derailed my own topic.