they want the inexpensive option to not really fill a specific niche, they want it to be a little uncomfortable, that you're already making compromises so you'll pay a grand for the fancy one instead.

What i'm trying to say is, making a smaller option would be cheaper. That would cannibalize high end sales. From the seller's point of view, you want the best alternative to compromise all of your desires, so it's not that big of a deal to just upgrade. something inherently small violates that.

HNers can identify the tradeoffs. Apple probably understands the tradeoffs better though. Apple exploits them. (I say this as a loyal iphone owner.)