First of all, let's clear the air about Apple's iPad and the Kindle Fire. Apple couldn't care less about the Kindle Fire. There is not a single device in the tablet market that requires Apple to create a "competitor" product.
In fact, one could argue that there is not a single device in the smartphone market that Apple is worried about either. The new iPad has reportedly sold out of preorder units, and the iPhone 4S drove Apple to its biggest quarter (and one of the best by any company) ever.
So, to suggest that the Kindle Fire is a catalyst for Apple to develop a new product is a little insulting to Apple. That being said, the rumors exist. The latest, from (who else) DigiTimes, suggests this Kindle Fire competitor from Apple will feature a 7.85-inch screen with a slimmer bezel to help maximize display area.
The report then goes on to say that the 7-inch iPad may not feature the Retina Display currently found on the iPhone 4, iPhone 4S, and the new iPad, but the device would target the lower end of the tablet market, adding a price point likely in the $249-$299 range.
I cannot stress enough how much I disagree that Apple would release an iPad with these specs. While a 7-inch iPad may very likely be in the mix down the road, there is no way Apple would release an inferior product simply to compete for market share in the low end of the tablet market. As it stands, Apple is mopping up in profit share at the high end, a much more valuable metric to consider.
If you are waiting for a smaller, cheaper iPad, your wait will likely be a long one. With the iPad 2 now available new from Apple for just $399, I wouldn't expect Apple to compete with itself anytime soon by adding a low-cost, 7-inch iPad. Should Apple expand the iPad lineup by adding a smaller tablet? Let me know your thoughts in the comments!