Regarding competition pricing

How does Porsche price its spare mufflers? Well, they take their cost structure into consideration, sure. However, they also don’t license any other non-OEMs to build clones of their mufflers (much akin to a closed platform like that of the iPhone or iPod touch). This is the entire justification for intellectual property rights as a means to create returns and incentives for innovation in industries that have high up front R&D cost. A marginal cost pricing structure for Apple or for Abbott laboratories just doesn’t cut it.
If you can’t extract maximum value from a captive audience then what’s the point? It’s perhaps politically incorrect to say out loud, but I doubt dope dealers are giving crack heads price cuts on their 12th purchase. Whereas my go-to deli for lunch, stamps my card every time I buy a sandwich, knowing that if my 12th sandwich isn’t free I’ll just take my 6.50 somewhere else.

On Cost of Goods Sold

In a competitive market manufacturers will price their products at marginal cost. As you’ve described above, in a pure sense the marginal cost for this product is virtually 0. Once the software is written, debugged and put into a format that is accessible to different platforms the marginal cost is virtually nil (the cost of transmitting it over, as you said). Depending on the industry you are in and the accounting treatment you want to use, portions of research and development get factored in to cost of goods sold.
In real life though there is this beautiful thing called overhead: you’ve got to pay for the secretary’s company car, Steve Job’s spa treatment, and the great catered food at the Apple campus. These costs have to get allocated (or eaten) to some product, division, expense code or money laundering activity.
Apple’s strategy in selling online music through iTunes has been to basically do it for free (royalties paid to record labels negate most of their profits until certain volume thresholds are met). The strategy being that it would boost and create a critical mass of iPods, iBooks, iPhones, iNaseaum. They “ate” some costs (and some negative profits) of their original iTunes operation in order to build up their market share of hardware. Apple already took its medicine, and it took it up front, investing aggressively in iTunes and running it at virtually no profit. If you add in their ultra-aggressive marketing campaign, expenses need to be allocated somewhere. Having achieved their goal of creating a captive audience and a critical mass of users, it only seems reasonable for them to attempt to recoup value wherever possible.
But Ian, Apple just had its most profitable quarter ever, they don’t need the extra money? If we can’t agree that people should run their businesses as profit maximizers, then that’s a whole different conversation.

On-End Value to The Consumer

Though there are some interesting pieces of consumer research investigating consumption decisions and consumer perceptions of marginal benefits, the purest example is what economists call “voting with your feet.” (I know, not all consumers are rational, yadda yadda).
What is the fair price? Well, the fair price is the price that someone is willing to pay. The fair price is the lowest price I am willing to charge and you are still willing to pay. This might not work as well if we are talking about a pound of bread that will keep you from starving: but lets face it, I only know of few techies that would die without the latest Apple software update. If you don’t like the $20 dollars the best way to communicate it to Apple is to not buy the software, as opposed to writing an email (or an angry blog post!)
But Ian, I already spent $3000 dollars on an entire Apple suite of hardware? It’s not fair!!
Exactly - YOU ALREADY SPENT IT! Spending an additional $20 bucks on top of it does not in any way help you recoup your investment; its a sunk cost.
I understand consumers being pissed off, about learning that the software on their 20 day old iPhone is ‘obsolete.’ Unfortunately its nothing new under the sun; you don’t hear people complaining to Mercedes about them launching a 2009 300E only a year after the 2008 300E. People don’t even seem to realize that major consumer packaged goods manufacturers like Pepsico and P&G on average launch 300-400 new product launches every year.