Smaller size is always more expensive.
Not too long ago laptops were far more expensive than desktops.
Fairly recently netbooks took off because of low price (and portablity).

Are MIDs (X86 compatible ones) the size of a NIT still to expensive to make ?
And there is battery life; X86 compatible processors still need more power (= bigger batteries) han ARMs.

And OSs for the ARM architecture are not yet commonplace.
Symbian and Mobile Windows have sold a lot of smartphones but are (slowly) on their way out and inadequate for a NIT/MID.
( An exception: the HTC Advantage; with a community developing ROMs with additional features.)
Linux seems to be the trend; there is Maemo, Openmoko but not yet much more.

So we are at a stage of the egg and the hen.
When Nokias "step 5" (N900 or N1000 or other) or similar of other make are launched, we will have the first products that could be succesfully marketed (almost) as efficiently as e.g. the Iphone.

( Although the existing NITs have no real competition, I believe Nokia has been wise to use them as a niche product and a base for developing an OS until it is ripe for a mass market. So long as they do not loose their head start.)

What size will the consumers want ?
Personally I like the pocketability of my N810.
With a side pocket on my pants I would prefere a 5 1/2 inch screen for a better display of photos.
Where between 3-6 inches of screen is the future ?