Your mistake is trying to explain everything with physical analogies. It straight up won't work properly.
but it costs a LOT of money to make the original.
Yes and so what? Should there be a link between those costs and the amount of copies sold? I see regional prices increased by as much as 500% sometimes. For titles that have been around for many years too.
It's just simple to assume that those initial costs will be recouped eventually, so long as the product is good enough. Regardless of piracy. I think it's also adequate to assume that people must be okay with paying the asking price for what they get, and that it will not make the business less successful, if the product is good enough. If it's not good enough then it shouldn't sell much in the first place, and it may be impossible to recoup costs.
This is like R&D/T&E cost for any manufactured product, so to call it "free" is a little disingenuous.
Fine, so let that small (albeit not free) cost of copying one digital copy slip from the pocket of the company. This is where pirates get it. They then create their own supply chain with their own R&D/T&E/whatever costs that are completely disconnected from the company and therefore shouldn't be a concern.
the "potential purchase" is horseshit
When pirates who weren't going to purchase a game try it for free and decide they actually want to support the developer or recommend it to a friend, this is a sale that wouldn't be possible without piracy. Not exactly horseshit.
If you walk into a department store and pick up a shirt (even if stock is infinite) because you want it but don't think it's cheap enough, that's theft.
Exactly because the stock is infinite no one would ask you to be responsible for what you've done. That t-shirt is probably cool and more people would want it when they see it on you. But really it just can't have infinite stock and a price at the same time.
if you don't uphold your end, that's not a transaction.
Why even care what transaction is? In the end, some potential sales convert into real sales and that's all that matters. Digital products can have demos and trials - there is no need for the nature of distribution to be "transactional".
"I'm never paying, I want it for free" which jacks the prices for the rest of us
Missing the logical link here. But anyway, those people should be outside of the target audience. Yet still there are ways how they can help generate potential sales. By wearing a t-shirt they got for free from some illegal store, you know.