[snowwrestler]

The Nexus 4 sells so cheaply because Google subsidizes its price heavily. Google is losing money on every single one that is sold, which is why it sells in such low volumes. It is a competitor to the iPhone in concept only.

A better comparison would be a recent 4G smartphone like the Samsung Galaxy Note 2. It lists for $699 and is available with a 2-year contract for $299 from Verizon--$100 more than the iPhone 5. Or the HTC Droid DNA, which lists for $599, available on contract for $199. Like Apple, Samsung and HTC are actual competitors in the market and need to make money on each phone they sell.

The flaw I see in your analysis is that it presupposes that competitors to Apple are going to be able to significantly undercut Apple on price. Apart from subsidized Nexus phones, I don't see much evidence that is true.