Last spring, TUAW asked how much you would pay for iPhone software. Well, it looks like $0.99 and $1.99 are the new $39.99 and $49.99 as far as mobile distribution goes. The App Store bucked the trend of high-priced phone software and now is ratcheting those prices down even further.
Developers are responding to high application supply and dwindling demand by lowering their prices across the board. As the App Store novelty wears off and consumers forget about once-"hot" items, the typical price tag continues dropping. Games that cost $9.99 at launch are almost universally $4.99 and less.
Apps like Koi Pond proved that $0.99 can generate a lot of sales. Short term sales are quickly being eclipsed by long term price drops. We typically get our tips about upcoming price changes directly from developers; 148Apps has introduced a automated price drop detector.
As the App Store continues to evolve from "get rich quick" to make money slowly, devs are working to find that sweet spot -- charging enough to earn a living but not so much that they aren't out-competed.
Based on these downward pricing trends, I expect ad-supported apps to really start taking off soon, the way they are doing in the jailbreak world. If developers can't build their revenue stream from charging higher prices, they may turn to alternative monetizing models instead.