There was an essay many years ago in the NMRA Bulletin about the costs of various scales. The bottom line was that the proposed that the costs are not that much different from scale to scale. His theory was that the model railroaders filled up the space they had, regardless of scale. So if they built in HO, they would end up with twice as much or more track and equipment than if they built in O. And the same relatively for N, the smaller the scale the more stuff the modeler buys, so in the end, he spends about the same money.
I think it is a pretty good theory too. For example around here, we have 2 large HO home layouts, both owners have hundreds of locomotives and thousands of cars, many custom painted. Their basements are as bigger or bigger than mine so they have space for O scale if they had wanted it.
I don't think cost is the deciding factor, I think familiarity has much more to do with it. I meet guys in HO all the time who are totally surprised that 2 rail O scale even exists. The thing they know is Lionel 3 rail when they here O mentioned. And there are many many of them in this area. The local hobby shops only carry N, HO, and Lionel and MTH sometimes. So they never see O scale and they have never seen it.
I've often wondered the same thing as the original poster. I think the reason is the notion in hobbyists minds that HO is indeed cheaper. IMHO, it once was but I agree with the above that that is no longer the case. Many of the guys in this hobby are older and what they remember is HO is a lot cheaper than O and also much more realistic. As it was mentioned they don't even know 2 rail O exists. So it was like a double bonus for them to go with HO scale. What these guys don't realize is the costs of the smaller scales have caught up to O scale (volume wise as described above). It was a slow transition so they never noticed it.
