How low will Amazon’s tablets go? We’re now hearing that a $99 Kindle Fire 7″ tablet is in production, and will be shipping this year. At a price that low, the Kindle Fire would be able to more easily compete at the tail end of the Android-based tablet market – an area which is today dominated by low-cost tablets out of China, often sold at the sub-$100 price point.

According to what we’ve heard, the $99 Kindle Fire HD will also still sport a TI processor like the rest of the lineup, and will have a 1280×600 resolution, like today’s Kindle Fire HD 7″ does.

This report follows an announcement Amazon made earlier this month about reduced prices on its Kindle Fire HD 8.9″ devices. The Wi-Fi-only version will now cost $269, down from $299, while the LTE version dropped from $499 to $399. It also follows news of a forthcoming carrier billing deal that’s about to go live  - something which hints that Amazon is now scaling up and becoming more aggressive with its product line up.

Typically, a price drop signals one of two things – that the manufacturer or retailer is attempting to clear out inventory ahead of a new model, or that it just wants to sell more of the item, at a faster pace. According to other industry experts with visibility into tablet usage trends we’ve spoken with, the Kindle Fire HD 8.9″ is not Amazon’s most popular model – the 7″ HD tablet is.

Today, that tablet is priced at a reasonable $199, while the older (non-HD, 2nd gen.) Kindle Fire is an even lower $159.

While a $99 price may seem extraordinary, IDC Research Director on tablets, Tom Mainelli, says that such a thing actually sounds reasonable. His firm just put out an updated tablet marketshare forecast this week, stating that this year tablets running Google’s Android operating system would overtake the iPad for the first time. The Amazon Kindle Fire, of course, uses its own forked version of Android.

Mainelli explains that Amazon’s competition isn’t just the iPad, it’s all these low-cost tablets running Android. Over Black Friday and the holidays in particular, you could get a $199 HD tablet from Amazon, the slightly cheaper non-HD version, or you could buy a $99 (or even in some cases $79) Android tablet from relatively unknown manufacturers in places like Walgreens, CVS, Bed, Bath & Beyond, and elsewhere.

“The infrastructure is definitely in place for Amazon to go even lower,” Mainelli says. “If they can sell the product at roughly what it costs to build, that fits their long-term vision to make money selling you content on that device. It’s entirely possible – physically possible – to create a device that costs $99, particularly at the scale that Amazon would do it,” he adds.

Android tablets prices across the board are coming down, too, which also lends credence to this possibility. For example, even HP recently announced a $169 Android device. Everyone in this space is beginning to attack the sub-$199 price point, given that Apple has staked out the high-end of the market at $329 and up.

So if the game is becoming “how low can you go?”, Amazon is in a good position to compete here, as it’s historically been a low-margin business. It doesn’t care what it makes from tablets right now – it’s about getting consumers a device which connects them back to the Amazon ecosystem, where they will spend on other Amazon products and services.

So if the game is becoming “how low can you go?”, Amazon is in a good position to compete here, as it’s historically been a low-margin business.

Mainelli also points out that the TI – the processor brand that Amazon uses in its current Kindle Fire devices – has been getting out of the chip business. It was even rumored last fall that Amazon was in advanced talks to buy TI. That never ended up happening, but what that story points to is that Amazon has deep ties with the chip maker, and could have easily cut a deal where it agreed to buy up TI’s remaining remaining stock for cheap. That could help Amazon now deeply discount its tablets retail prices.

Amazon sold 4.8 million Kindle Fires in 2011 (shipping only in the fourth quarter), and in 2012, it shipped 10.4 million units worldwide, according to IDC’s estimates. It has been widely reported that these tablets are sold at a loss, though Amazon CEO Jeff Bezos told the BBC in October that’s not quite true.

“We sell the hardware at our cost, so it is break-even on the hardware,” Bezos said at the time.

Amazon could break even at the $99 price point, and get its tablet into more people’s hands by doing so, pulling them in to its ecosystem.

For what it’s worth, Amazon denies that such a price drop will be happening. “We are already at the lowest price points possible for that hardware,” a company representative told us.

For that hardware, maybe.