Rumors started circulating yesterday that Amazon was working on three new versions of its Kindle Fire tablet – a 9.8-inch version, a high resolution 7-inch version, and a lower cost 7-inch version with a standard display.

According to a new rumor from DigiTimes this morning, Google is also working on its own inexpensive 7-inch tablet that’s designed to compete with Amazon’s low cost Kindle Fire.

Google is reportedly working with Asustek Computer to launch its new tablet in May or June of 2012. Such a tablet may put pressure on competing vendors, like Acer, Lenovo, and Samsung Electronics, causing them to initiate price cuts.

Amazon’s new offerings are expected to start at $199 and go up to $299, so Google will price its own tablet at $199 to prevent Amazon from having a price advantage.

This pricing war between Amazon and Google has already had an impact on other vendors, and Acer and Lenovo’s 7-inch tablets are now available for around $279. Samsung and Asustek Computer may soon be forced to drop their prices as well, because tablets from those brands are still priced at $500.

Currently, tablet PCs have an average gross margin of 10 to 15 percent, but as tablet prices drop during pricing wars, that gross margin is expected to shrink, leaving tablet manufacturers and component makers scrabbling for slim profits.

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