I bought the iPad in 2010 and the iPad 3 this year, but I think that if I had the choice between a $499 9.7" iPad and a $199-$249 7.85" iPad, I had probably settled with the 7.85" iPad.
Assuming all the specs are (almost) the same except for the retina display (so 1024*768 7.85" against 2048*1536 9.7") I would still settle with a 7.85" iPad.
I mean, you immediately save $300 and would still get an almost equal iPad (except for the retina display).
I believe Apple needs to reduce the price of the 9.7" iPad, if the smaller iPad costs only $199. I suppose this would be the best set-up:
2012:
$199 - iPad mini 16 GB (equal to iPad 2)
$299 - iPad 2 16 GB
$399 - iPad 3 16 GB (or 32 GB)
2013:
$199 - iPad mini 2 16 GB (equal to iPad 3)
$299 - iPad 3 16 GB
$399 - iPad 4 16 GB (or 32 GB)
I believe this is the onliest way for Apple to stay competitive with... Apple.
The iPad mini will always have the same specs as the previous-gen "premium" 9.7" model.
So this is what you get:
$199 - cheapest iPad model, 7.85", previous-gen specs
$299 - same as model above except 9.7", previous-gen specs
$399 - 9.7" premium model, 9.7", newest specs and newest features
If Apple is going to introduce an iPad mini, I believe it will be a very risky move. They make A LOT of profit with the $499 iPad (and up). If they introduce an iPad mini at $199 they risk losing customers (as in: first people would settle with the expensive $499 model, now they settle with the much cheaper $199 model). A $199 model will be less, really less, profitable.