Blu-ray is this generations version of LaserDisk (LD).
As you may remember, when VCRs were the king of the home entertainment center, the movie and home theater enthusiasts were all gushing about LD. Like blu-ray, LD offered better video and audio over the more popular VHS, but required higher end equipment in order to be enjoyed properly. This was before home surround systems were cheap, mind you. LDs were also more expensive than VHS tapes, mainly because the market was smaller.
Blu-ray is still a young technology. When DVD was blu-ray's age, it too was quite expensive. Players were around $1000, and movies were $45 or so. If you were lucky, you might find them for $35 (woo-hoo!) but as DVD's popularity grew, prices dropped. Quickly.
I'm uncertain if blu-ray will actually replace DVD or not. Remember, it took DVD just over 8 years before it overtook VHS in terms of marketshare (which is amazing!) yet it was only a few years ago (2005?) that studios stopped selling VHS movies. By that time scale, we're looking at 2020 before DVD would be in danger of disappearing from store shelves.
Also, In DVD's case, there were plenty of good reasons for EVERYONE to upgrade - better picture, better durability, better sound, better features, etc. You didn't need new equipment, either. More importantly, however, was that the DVD player would work with your existing TV and sound system.
Blu-ray, meanwhile, only really provides better picture, and at best, slightly better sound - but only if you have the equipment and home theater room to appreciate it. Most experts agree that blu-ray will be mostly indistinguishable from an upscaled DVD on anything smaller than a 40" 1080p screen. Of course, these sets start at $1500 and only go up in price. Likewise, blu-ray's 7.1 surround sound support requires a 7.1 capable receiver and additional speakers but even then, will probably not sound much different than the 5.1 surround sound system most folks currently have.
This means your average person without a HDTV is easily looking at an investment of $2000-3000 to upgrade his TV and sound system all before spending another $400 or more on the blu-ray player itself (in my case, the PS3 works just fine.) That's quite a barrier to entry, which I'm pretty sure will keep blu-ray firmly in the realm of the high-end, movie or home theater enthusiast, and out of the reach (or care) of the average consumer.
As for the higher prices on blu-ray, that's to be expected as well. Newer technologies always cost more money in the beginning. Personally I don't see a reason to buy Lost in blu-ray. A good upscaling DVD player on even a modest HDTV will look about as good as when you watched the episodes in when they were broadcast in HD because almost ALL HD broadcasts are only in 720p to begin with.
Personally, I think DVD/blu-ray prices are just outrageous to begin with. $50 for a season of TV? But then you know they'll go back and do a "complete series" super boxset that simply contains all the boxes duct-taped together, and the whole thing will cost much, much less than $50/season. I've just about given up buying DVDs. Now, I just rent through Netflix (TV series too!) When the super-duper-el-cheapo box arrives, then I'll buy. Needless to say, I haven't bought any blu-ray discs (yes, I have a large HDTV and a PS3)