The economics of hardware subsidization aren’t as significant in mobile phone
contracts as you might think. The mobile phone companies could sell you a $20 phone that would work just fine. They do in other countries, and they used to do it in the US. They don’t any more, though, because if they offer the option, people take it instead of getting locked into a lengthy contract.
The Nokia phone I bought here in South Africa is about $20, with a plain black-and-white screen, no camera. It’s lighter, sturdier, and more reliable than my $200 Motorola RAZR. It’s also a nicer phone than the “cheap” $70 Nokia that T-Mobile tried to sell me in Oregon when I wanted to replace my RAZR without an extended contract. (It had a color screen, but the cheap construction of something out of a gumball machine.)
This is the behavior of an effective monopoly. In this case it’s a small group of companies, but they’re all playing the same game.