The smaller-screen iPad would be highly portable and fit between Apple's iPhone and 9.7-inch iPad, said Roger Kay, principal analyst at Endpoint Technologies Associates.
"It may be more portable than the 9.7-inch [iPad], and it may have more functionality than the iPhone," Kay said.
Users may prefer the portability of a smaller-screen iPad, especially those who use the iPhone for a lot of work, Kay said. However, watching a movie or gaming would be better on a larger-screen iPad with the high-resolution Retina display, Kay said.
"It's a test on how form factors will play out and what models users need for work and play," Kay said.
Using a smaller-screen tablet may be better for reading e-books or using custom applications designed for the display size, said David Daoud, research director at IDC. But it could also be stressful on the eyes in some cases, like when playing games or watching a high-definition movie, Daoud said.
A smaller-screen iPad would be attractive to students and also fit well in schools and universities, Daoud said. Apple earlier this year started offering iBooks 2, a tablet application that brings multimedia textbooks to students.
Decisions about which tablet to buy will also be tied to mobile broadband contracts with carriers, Daoud said. It remains to be seen if Apple will be able to sell both iPads to users who have 3G or 4G subscriptions, which are usually tied to specific devices.
Analysts said that Google and Amazon are selling tablets at a loss in an effort to promote their entertainment, application and cloud services, and Apple usually makes profits off its hardware. The company won't get into a pricing battle with Android devices, analysts said.