The iPad mini is "just another option" at $329. I ordered one because it's the iPad i've been wanting since I got my launch day iPad 1, but they needed to come down to $249 if they wanted to eliminate the Fire HD and Nexus 7 from the conversation.
The reason the 9.7" iPad does so well is because that price range and size, it's the most compelling and undisputed option. The Android tablets are flooded with various 10" models that don't really differentiate themselves from each other. The Microsoft Surface will be an interesting competitor, but only time will tell.
As for the 7"ish market, it's a lot less crowded for the top spot. When you think 7" tablets right now it's pretty much the Nexus 7, Fire HD, and possibly the Nook and Samsung tablets. The great thing about the 7" market is that all the main competitors are different enough to distinguish themselves from each other. The Nexus 7 could have run away with this market, but the Fire HD is such an interesting choice especially for those that are already married to the Amazon eco-system. As for the iPad mini, if it were at $249 then it could have easily run away with this market, but at $329 I bet most people are more likely to compare the iPad mini with other iPad options then they would with the lower priced 7" market.