I think it's pretty much a fait accompli that Google will release a 32GB Nexus 7 priced similarly to the current 16GB model. Given the current rumors surrounding the iPad Mini, its 8GB flavor will be at least $300. That's gonna place the 32GB iPad Mini somewhere in the $400-450 range. Even if they put in a nice rear-facing camera and Retina, it's going to be a very steep upgrade from $200 to $450 for a tablet with a slightly larger screen and a camera.
Don't get me wrong, they'll sell like hotcakes. Apple has a dedicated fanbase with sufficient disposable income to ensure massive sales.
But it's not going to be a competitor for marketspace with something closer to half the price with only marginally reduced specs. There's PLENTY of market room for continued success of a Nexus 7, it's priced at nearly "throwaway toy accessory" prices. There will be plenty of new tablet owners (like me) who will pick up a Nexus Seven (like I did) because it represents a decently-built tablet with plenty of power under the hood that is affordable enough to actually buy without feeling guilty about tapping into the butter-and-egg money.
I don't honestly think an iPad Mini is going to cut deeply into Nexus Seven sales any more than the Nexus Seven is going to end up cutting into iPad Mini sales. The price difference is going to be sufficient to ensure that the two companies will be pursuing almost completely different demographic groups. A lot of people with enough free cash to buy an iPad Mini might also pick up a Nexus 7 as their "carry around town, don't worry as much about breaking it" throwaway spare.
There will be plenty of noise and angst and gnashing of teeth on both sides, of course, but that's been true since the iPhone started taking market share from Blackberry to be the hot new smartphone, and back further to back when PDAs didn't have cell radios in them. The current two leaders (Apple and Google) will duke it out.
And in the ensuing price war, we win.