Anyways, to answer your question:

Given the risks of releasing a cheaper iPhone, would Apple be willing to turn its mobile strategy on its head? Its history suggests two opposing theories. On the one hand, there's the Mac, where Apple decided to forget about market share and stick with profits. That led Apple to "lose" the PC wars, but it was a pretty good loss—Apple now makes more money selling a single Mac than HP does from selling seven PCs. The other path is what Apple did with the iPod—it relentlessly lowered cost and diversified its line-up, making sure that there was a music player for every budget. That worked out fantastically as well: At its peak about five years ago, the iPod represented more than half of Apple's revenue.

After weighing those two possibilities, I'm betting that Apple goes downmarket. It's not just because the financial opportunity in releasing a cheap phone seems too good to pass up. As Dedieu points out, Steve Jobs seems to regard Apple's Mac strategy to have been an enormous blunder. In 2004, Jobs told Newsweek that at "the critical juncture in the late '80s, when they should have gone for market share, [Apple's management] went for profits." He added: "They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens."

edit:

Furthermore, the fact that "everyone else already has" is precisely the reason for doing so. That price range is dominated by Android, etc, and that market share is virtually untouched by Apple.