The usual price-setting method is to look at the entire potential market, from the many at the economic lower end to the few at the top, and set a price somewhere in between the top and bottom that will maximize total revenues. But if you cede the bottom to piracy, you can set a price between the top and the middle. The result: higher revenues per copy, and potentially higher revenues overall.
(This is, by the way, the opposite of the conventional economic approach to developing-world piracy, which is to lower the cost of a product closer to the pirate version, closing the pricing gap to try to win customers over to the official version. In practice, however, the pirate price is so low that it's rarely possible to close that gap enough to make much of a difference.)
