DigiTimes is reporting that after iPad 3 launch in first quarter of 2012, Apple is planning to launch a 7.85-inch model prior to the fourth quarter of 2012. Max Wang posted:

However, in order to cope with increasing market competition including the 7-inch Kindle Fire from Amazon and the launch of large-size smartphones from handset vendors, Apple has been persuaded into the development of 7.85-inch iPads, the sources indicated.

In addition to purchasing 7.85-inch panels from LG Display, Apple will also buy panels from AU Optronics (AUO), indicated the sources, adding that makers in the supply chain are likely to begin production of the 7.85-inch models at the end of the second quarter of 2012.

Rumors about smaller size iPad model have been going around since the original iPad was launched in 2010. However, Apple has denied such rumors by saying they believe that 9.7-inch screen is the perfect size for tablets. But now with success of Nook tablet and Kindle Fire it looks like Apple will have to bring a smaller tablet to the market to compete at lower price points.