The problem is that people who want a small phone prioritize the size.

Most of them don't care about the premium features of larger phones. So the Mini was a weird niche within a niche. Small phone with premium price and features.

The Mini and SE2 were virtually identical in physical size. For the 16e they should have used the iPhone 12/13 Mini body and the 13 Mini screen. Use the 15 Pro SoC with 8GB memory, and the 15 camera. Sell it for an SE price. Now you have fused the small phone and budget iPhone markets.

I can confirm, that Apple my misunderstood the market: I was eager to buy a new iPhone because I just finished my masters degree and started a new job, had a bit of money and than the SE2 launched. My 5s or SE1 started to age and as an beginner app developer a current phone was important. I was so happy because I could not see my self using one of those bigger phones even though the SE2 was still bigger than my 5s/SE1. A few months later the mini was released and my initial reaction was "OMG this is THE perfect phone, but I just got a new one... i can not afford to buy another one".

The iPhone 13 mini had even worse performance than the iPhone 12 mini even though it wasn't released alongside an SE.