They would also buy the same spec for half the price. Or an entry level for the same price with 128GB. More realistically : would it be better to have a more expensive entry level with 32GB? Maybe. Just because apple might be technically able to offer the product configuration you want them to for the price you want them to doesn't mean it is the right thing for them to do.
Here's the thing. You don't get to decide what is right, or what is better, for anyone except you.
Apple may be doing this mostly for product differentiation purposes; they may not. But whatever the rationale, it is working for them, well enough to pretty much define the category of premier smart phone. Arguing that this is somehow irrational comes across as either sour grapes or naive.
What you and everyone that is voting me down seem to overlook for some rather crazy reason (The only thing that makes any sense is protective defensive excuse making for Apple) is that they are shooting themselves in the foot. Sure, people buy the 16GB phone, usually thinking they are getting 16GB and thinking that is a lot without realizing that out of the box it's only 14GB and once they install some things and want to buy some music and take some pictures they are running out of room on double time.
Now they are stuck with a phone that is of an inadequate size in order to not only fully utilize it, but also it impacts developers and sales and companies that are constantly trying to push their incidental apps onto people.
I don't get your opposition to bigger storage when the increased storage would probably cost Apple literally next to nothing. Do you understan that the delta between the cost of 16 and 32 GB, let alone even 64 GB is basically negligible for them? It does not seem at all to be about cost, it's all about perceived price maximization, but I am rather certain their calculations either don't quite make sense or they are not properly considering and weighting their inputs.
I also don't understand why developers are not up in arms because Apple's foolishness keeps their app from being installed and used, which leads to decreased revenues. It really undercuts the whole ecosystem because people with 16 GB phones are not installing the hilton app, not installing the app for every airline, not installing health kit apps, not installing care kit apps, and not installing various other incidental apps that the ecosystem really requires you to have installed but take up way too much space to justify keeping installed on a regular basis.
I don't have any opposition to bigger storage, where did you get such a strange idea?
Clearly you are much smarter about this than Apple is. Their failure to understand the market as well as you have has undeniably lead to shrinking margins and market share, eventually to their exit from the premium phone market. It's a shame nobody buys their phones anymore.
More seriously - there are good criticisms that can be made of apples strategy, but they aren't the ones you are making. Your complaints show a naivety about how such markets work, and why.
In many markets, price is not a function of cost but a function of value (perceived or otherwise). In fact, this can be viewed as the defining characteristic of markets a company like Apple wants to be in, vs. those it doesn't want to be in. Competing in a commodity market is brutal.
That isn't to say that there aren't good arguments about why 32GB base would be better, but COGS delta isn't one of them, and focusing on it demonstrates a pretty fundamental lack of understanding of what market this phone is in.