This reflected a simple truth about the early years of D&D: the players in those pioneering campaigns tended to top out around levels 10-12, levels at which a balrog was a perfectly fine adversary. Dragons are tough but not unbeatable, and characters are as likely to meet those huge numbers of humanoids listed in M&T (like 30-300 orcs) as they were to fight a big bad, and they probably were running domains instead of just adventuring into further and bigger dungeons. In part this is a question of the endgame that is talked about, but in part it's the style of play expected in the early D&D game.
It's clear that creating levels going up to 20 or so in Greyhawk influenced players to actually go up to those levels, and TSR responded by creating more and tougher enemies, particularly in Eldritch Wizardry. The balrog comes back with a transparently similar name, and a lot of buddies - the familiar Type I through V, plus the unique demon lords Orcus and Demogorgon.
The balrog was unique in several ways. It introduced magic resistance to the game, with the irony that their removal actually creates the false impression that OD&D wasn't supposed to have this mechanic. This is one of the mechanics, particularly through its implementation in Eldritch Wizardry and AD&D, that was supposed to work around the idea of what is today called "caster supremacy." Demons and otherworldly horrors should be fundamentally different, and not allow characters to simply use spells to do away with them. EW also made them have different hit die sizes, which works well for the extreme enemies.
Demons are a solid focus for the high levels, and they introduce a particular element to the game that had been neglected, namely beings from other planes. Contact Higher Plane existed in Men & Magic, and Greyhawk had Commune, Gate, and Astral Spell, but neither hide nor hair of anything that existed on any of the planes it referenced, except for a parenthetical statement that Gate could summon "Odin, Crom, Set, Cthulhu, the Shining One, a demi-god, or whatever."
I think the "higher planes" in OD&D are ripe with adventuring potential; the simple fact that you had to roll against insanity simply for contacting them made them special. The implementations of the planes in a literal-minded extension of alignment in the AD&D Player's Handbook was a waste of this tremendous potential. My next couple of posts are going to delve into planar potential a bit and discuss the possibilities for creating new monsters.
The extraplanar cosmology of the game is something that I do think needs to be examined and reassessed. The AD&D direction seems too systematic, and, as you say, far from the conception that seems to exist in the Contact Other Plane spell. I look forward to your discussion and analysis.
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