I believe Apple is aware of that, which is why they currently sell not only the iPhone 5 but the iPhone 4S and iPhone 4 as well. Attacking the "lower-end iOS" market would still be toe-to-toe with Apple.
Well, in the US, no one's buying unlocked bottom-tier iPhones. I don't know about overseas, though. Are a lot of people buying $200 Andoid phones in Europe?