Free agents earnings potential is barely considered when players decide whether to test the market.  This leads to some pretty horrendous decisions, like the superstar who takes a 5/$40M deal in his arb seasons instead of holding out for 5/$75 as a free agent.  This leads to too little turnover of talent signed at bargain prices.  This is both unrealistic and bad for teams trying to rebuild against the world juggernauts.

How about fair pricing by using offer sheets along the lines of the NBA or NHL.  Have a day right after budget day where all 32 teams can make a binding bid for every free agent or arb elibible player above the players salary demands.  This is basically what happens when a player decides whether to accept arb.  On the same day, have the players team decide whether to make a qualifying offer of their departing players demands. Then on the first day of free agency, let each owner decide whether to match the offer if such an offer emerges.  All offers and offer matches must conform to budget limits of course.

Let the open market decide the real cost of signing talent. 

That's true.  I believe that the current Free Agency dynamics emulates MLB even less.  

I disagree.  The HBD FA process emulates MLB quite well.  You seem to feel that the results are not to your expectations.  That's no reason to just toss the current process aside and replace it with something that is radically different which has absolutely no resemblence to MLB.

If you feel that something is wrong with the current process, identify the problem and propose a tweak to address it.

Right. There's no arb players that would ever grab the money now instead of waiting 2 years.

You want realism, have that player whine in year 4 or 5 of the deal. Just spam the hell out of the correspendence box with his whining about disrespect and not being paid full value. NOW you're being realistic.

I want Scott Boras style books for all pending free agents.  Or Carl Crawford's agents sending me an iPad with his videos.

A true market based demands system would accomplish this goal without sacrificing realism. Base demands (and arb awards) on contracts of others in the world.

I'm not entirely sure arb doesn't work that way.    I've found similar players in different worlds making widely varied arb demands.   It could be based on the talent of the world(a 73 is much higher on the talent scale in one world) or it could be based on contracts handed out to similar players.  They do show a minimum, average and maximum on the arb page.

I'm pretty sure that FA signings affect the price of arbitration and FA demands. In one of my worlds we had 3 or 4 pitchers sign max contracts in year 2 and demands for pitchers went way up.