Why? because a software developer will say, 'Wow, I can get paid that much for doing something that I love? Sure!', and they'll take whatever they're given.
But, ask yourself, do you think the person in sales does the same thing? The person in finance or marketing?
Look, you don't need to be a world-class developer to make $200k / year. You just have to be 1% better than the developer making $190k / year.
As a baseline, a typical services / contracting company will bill a senior developer at $190 / hour. The math is straight-forward.
This works for product companies, as well. You and your 20-person engineering team build a product that ends up being worth $100M? (completely realistic, btw) Yeah, even at paying $200k / year, the company and investors are making out.
It's funny, actually. For all of the software people that I know who are self-described libertarians, when it comes to their salary they are willing to lean socialist.
I'd be really interested to hear your examples of companies that pay significantly more and allow you live in a low cost/high quality city.
It's sometimes envy-inducing for me to look at what other data-oriented directors make and compare it to my own comp. But I also live in Maine, and somehow, in walking distance to the beach and "only" 90 minutes to Boston. Cost of living matters massively, especially once you have a family, kids and want to own instead of rent. Even if I ditch the coastal part, I'm not sure I even want to look at what a comparable 3 bedroom, 2000 sq ft home would cost anywhere near SF or Silicon Valley. Screw it, I'm gonna look:
http://move2siliconvalley.com/tag/real-estate/
Let's pick Campbell because it's somewhere in the middle, I like Rancid and Lars Frederiksen. $648/sqft, and generally under a quarter acre lot. You got 1.3M I could borrow? That's like 5 of my houses. Roughly $6500 a month (78k a year) factoring in property taxes. Suddenly 300k a year doesn't seem like a whole lot once you pay your taxes and put a roof over your family's head.