Believe it or not, the material cost in a Mode C/S transponder is of the order of £200.
Like most avionics, they list at 10x the parts cost because most firms making this stuff are olde fashioned big firms where every useless middle manager has a deputy, because the stuff is often designed by "engineers" who would never get a job designing anything that has to compete commercially so the stuff packs up often so warranty costs are high, because new product introductions are rare so anyone with a brain gets bored and leaves, because the aviation community has always accepted junk products, because the avionics shop gets a nice markup, etc.
A small firm (say 10 employees) could easily cater for the whole European existing GA transponder market. But it's very hard for someone to get in because the way the GA market is structured few people can do own fitting, and an avionics shop will much rather make 30% of £2000 than 30% of £500 (plus fitting). Avionics shops just love a regular GNS430 fitting job
If Mode C/S had been MANDATED on everything that flies, the market for transponders would be some 10x bigger than it is today. It is trivial to design a unit which works perfectly well for TCAS, and well enough for short range (say 30 miles) secondary radar and which draws 1/10 of the present power requirement. Total parts cost under £150 (100-off batches) and a list price of £500 assuming a 25% dealer discount.
But until transponders are mandatory, the market won't exist. Nobody will have a go because everybody knows that any existing transponder maker can produce a low power unit if they choose to (it's very easy to do) and since they have the dealer channel all set up they will clean up. But as I say the existing players won't do anything until the market is there, and then they will milk it for all it's worth.
Something might happen around 2009, when there should be a lot of demand for Mode S. But most of that will be powered stuff where the existing GTX330-type products will get fitted.
A very bold small company could get in now but they would be fools to show their cards 4 years before the market materialises, and almost nobody in "normal VFR GA" will fit a transponder to make themselves visible to others (yes I really do believe this!)