Before the Retina display the iPad screen was still magnificent. All of a sudden the iPad 3 comes out and right away people think looking at the iPad 1 or 2 is like burning the eyes. I have an iPad 1 and an iPad 3, and quite frankly the difference is not all that great.
The iPad mini will do well, but I don't think it will kill the regular iPad. What it will probably kill is the Kindle Fire, but even that is doubtful.
What the iPad mini will do the most is allow more people to buy an iPad like device and introduce more people to the Apple ecosystem. I know quite a few people that switched from Windows based machines to the Mac, just because of the ease of use of the iPhone and later the iPad.
The iPad mini could be an entry point for a lot of people into other Apple products. The iPad Mini will also have it's own market. Those people that want to be able to do more than what the Kindle Fire can do but don't want the larger size of the iPad. The e-reader market will probably be the main market for the iPad mini. It will be the most advanced e-reader out there. When it comes to reading, I do prefer reading my Kindle touch more than the iPad, mainly because of size. The smaller size is easier to hold and carry around.
Even if the iPad mini can do everything that the iPad 1 or 2 can do, it's size will hinder it and people will still look to the larger sized iPad for those tasks where the screen is just too small.
The iPad mini market will most likely be the everyday person looking for an e-reader that can do a bit more than the Kindle Fire, but with the ease and power of the iOS operating system. The Kindle Fire runs a scaled down version of the Android system and that hinders a lot of what the Kindle is capable of. The iPad mini is perfect for those that want something larger than an iPod touch or iPhone, but smaller than an iPad.