"There are two distinct marketplaces for guitars, and almost any musical instrument. There is the 'beginner' level, which is basically school aged children... Then there is the high end collector market, who spend the big bucks"
This is missing out the vast midrange of working musicians (or erstwhile working musicians who still play a lot privately).
In the Fender world, collectors might buy old or particularly prestigious models, but your standard MIA Strat is a working guitar that won't necessarily appreciate in value but isn't typically bought by beginners (or collectors, for that matter). Same with many other brands (such as those you'd see played by guitar bands); while Ibanez or Jackson might have a relatively cheap model aimed at beginners, they also make rock-solid working guitars that you see played in your local bar or club, or in studio, or on stadium stages, but not in a collector's vault.
Musical toys - things like Guitar Hero. Instant gratification, very limited musical content.
Entry-level instruments - cheap-ish, poor quality, fine for beginners, basically disposable because they're (ironically) difficult to play and don't sound great.
Prosumer instruments - some minor compromises, not particularly affordable, but not so insanely expensive they're out of the reach of anyone who really wants/needs them. This notch covers a range from good enough to rather fine.
High-end professional and collector instruments - no compromise, nicely finished, often insanely overpriced. The good ones can raise production values a notch or two over the prosumer level, but they're utterly wasted on anyone with average talent. The silly ones are just for show and bragging rights.
The MI firms love collectors because they'll drop five figures on instruments they can't really play. And they'll do it over and over.
Meanwhile name professionals tend to get handed prosumer or sometimes collector instruments for free as part of an endorsement deal or even just on the off-chance the item will appear in a photo. (I used to know a film composer before he moved to Hollywood, and he was always getting offered the latest gear for nothing, even before he was that big a name.)
Entry-level instruments - cheap-ish, poor quality, fine for beginners, basically disposable because they're (ironically) difficult to play and don't sound great.
I suspect this is one of the reasons for the cited 90% quit rate. If it's something you're not sure you'll have an aptitude for or even like, you're probably not going to invest much in your first guitar. But the result of that is an instrument that's far more difficult to get to make nice sounds. AFAIK, guitar is the worst for this - other instruments at the entry level might not have great sound, but aren't going to be downright hard to play.
This! 1000x this! One of the most frustrating things about learning an instrument is that it initially sounds terrible and you feel like you will never get it. If you have a low quality instrument and are inexperienced, you honestly cannot tell if it is you or the guitar.
This is why I heartily recommend to anyone trying to learn to pick-up a mid-range guitar used. You get much higher quality and the price is usually comparble to a "cheap" beginner one.
I was lucky enough to start on a good guitar, but I later tried a couple ~$100-150 "starter" guitars. If I'd started on those I would have quit. Even knowing how to play (more or less) I couldn't make them sound good, and it took a lot of effort just to keep them from buzzing and such.
Agreed that I left out an important segment, but I guess I was focused on the business case for the two extremes. The low end entry level stuff probably makes money for Fender due to the sheer turnover. The high end makes them money due to the larger profit margins.
As for the mid range, or 'working musicians guitars', it wouldn't surprise me if these were 'break even' or loss leaders for them. Most working musicians I know have a mid range workhorse guitar they use on bar gigs and open mics, but they also usually tend to have a high end guitar or two that they use for wedding gigs or purely for recording/private playing.
I can't provide sources (for obvious reasons), but I can tell you that there's a power-law relationship between retail price and gross margin. The cheapest starter guitars are very close to breakeven because of absolutely vicious price competition. Mid-range instruments are less profitable than they used to be, but they're still the bread and butter of the industry. The "custom shop" level of instruments are outrageously profitable, but they're also rather difficult to sell. Buyers for $5,000 guitars are few in number and exceedingly picky.
Prestige brands like Gibson, Fender and PRS rely to a significant extent on the "rich dentist" market of collectors, but most other brands don't sell significant quantities of super-premium guitars. Top-shelf guitars are often halo products, used to elevate the prestige of more affordable mid-range guitars. Having a "custom shop" in America or Japan is often treated as a marketing expense rather than a profit center.
This is missing out the vast midrange of working musicians (or erstwhile working musicians who still play a lot privately).
In the Fender world, collectors might buy old or particularly prestigious models, but your standard MIA Strat is a working guitar that won't necessarily appreciate in value but isn't typically bought by beginners (or collectors, for that matter). Same with many other brands (such as those you'd see played by guitar bands); while Ibanez or Jackson might have a relatively cheap model aimed at beginners, they also make rock-solid working guitars that you see played in your local bar or club, or in studio, or on stadium stages, but not in a collector's vault.