My guess is they are only able to make the phones cheap if it’s sold at huge scale. If you make some niche small phone, the price goes way up and doesn’t look attractive.
Then you have to deal with the fact that the people with obscure requirements have a million other requirements. The person asking for a small phone then complains it doesn’t have a headphone jack, and AV1 decoding, and 16gb memory, and an unlocked bootloader, and whatever else.
While being more expensive even further decreases your niche size, it still isn't obvious to me that this should be enough to prevent the niche from existing. I am one of those customers you talk about who has a lot of obscure preferences (I can't call them requirements because literally not a single existing phone matches all of them and yet I still buy phones). A phone that met most of them would be something I'd be willing to pay a pretty good premium for.
Then you have to deal with the fact that the people with obscure requirements have a million other requirements. The person asking for a small phone then complains it doesn’t have a headphone jack, and AV1 decoding, and 16gb memory, and an unlocked bootloader, and whatever else.