It is moot to argue whether Apple *needs* a smaller or cheaper or larger iPhone. Apple doesn't *need* to do anything. It can close its doors for 2 years, and reopen with an awesome, copycat-inspiring product and its share price will likely recover.
Apple also didn't *need* to release an iPad Mini. But it did. It did so because the change in form factor did not restrict the company's ability or desire to imbue the premium qualities of choice (choice is important here because, as much as some will disagree, Apple also compromises). Of course, Apple also observed that the form factor was more utilitarian than originally assumed and there was very strong market potential. Anecdotal evidence suggests Eddy Cue was the one who pushed for this, and he has been proven right.
But what if Apple didn't release the iPad Mini just in time for the Christmas season? Pundits claim that the 7-8" form factor outsold the 9-10" size in the last 2-3 months. Be that as it may, I would argue that at least half of the Mini buys would not have defaulted to the Kindle, the Nexus 7 or Galaxy S Tab. Many would have bought iPad instead. Others might have settled for an iPod Touch or even a completely different products. (Lest we forget, Christmas shopping is not for need and, therefore, an iPad (Mini or not) can be replaced by a TV for the bedroom.)
So, what about a second iPhone in the lineup? It is not going to a more expensive one. The current product will be the flagship product, or *premium* one if you like. If it is going to be cheaper? What will be compromised? Well, you can't very well give up email, web surfing, reading, messaging (SMS or MMS) or media playing. Will Apple release an iPhone that can still do all of those very well, but lacks the ability to run apps? Such a product will compete with Nokia's Asha, for example, which has appeal in regions such as rural China, India, Africa and even pockets of South America - all markets that Apple has not invested in so far. So it's possible but unlikely.
Returning to the iPod analogy, the raison d'etre for the iPod Nano is not necessarily a lower price point. The form factor was (is) much more appealing both in physical and psychological terms (the cute factor cannot be ignored). In terms of functionality, capacity was reduced and video playing was lost (and came, went and returned). Neither was important compared to the gain in form factor. This also happens to be true of iPad Mini - the lack of Retina Display was more than offset by the greater portability.
In summary, if Apple releases a second phone in its lineup (not just an obsolete product), it will be cheaper. It will have reduced functionality. But it will likely also have something else that will make it compelling in its own right if not irresistible. It's hard to imagine if form factor will again be the difference maker (but Apple is very capable of surprising us). Whatever it will be, it will be the topic of debate/discussion, if not another why-didn't-I-think-of-that moment, more so than the price itself.