God your dumber than you look!
You can't change the numbers on a speedometer, and have you ever wondered how a car knows it's speed and distance travelled?
In a cellular phone, the signal received is read, giving you an indication of it's strength. Now most non smart phones, don't even tell you what protocol you've attached to, ie edge, 3g etc.
An iPhone uses that info, to determine what protocol it chooses. If it is reporting incorrectly, whilst you may have a good signal, the reading indicates it's poor, prompting the iOS to look for another protocol, if it cannot find one, it'll drop the connection and 'no signal' appears. It won't find another, as the algorithm has the same issue on all protocols.
The software drops the connection to save battery life, as it is well known that to keep on searching for signal uses high battery consumption.