Rather than I market failure, I think this is a clever design. All users will not follow suit like you suggest, some will value liquidity over returns, and visa versa. This aspect ensures that, around 90% of Steem will remain Powered Up, moving forward. This protects the Steem Economy from a Dump Culture that we see so much in other Cryptocurrencies.
Steem Dollars do not count as Steem..
What makes something a market failure is the lack of coordination of who does what, and when an event simultaneously affects the self interest of individuals in a group and the group responds without coordination. It's not necessarily that they all react to the event, but it also occurs that they all don't respond/react expecting others to do it for them instead. Without some coordinating factor, we will always have some less than ideal outcome. But that may be okay...
I'm going to go further and suggest that STEEM POWER will tend to always be above 90% rather than equalizing at 90%, this is because it's value is more than just in getting a bigger cut of the supply increase, it also allows for control over rewards. So long as that has value to people, then they will 'pay' for it by accepting some amount of dilution.
I'm still wondering though, why would anyone hold powerless STEEM? I mean early in STEEM there is going to be a lot of growth, new users and injection of capital, people powering up, but this will hit market saturation and at that point increasing supply will simply decrease value.