Libraries can do a lot to benefit from the tendency to smaller niche markets, and they shouldn't be afraid of competing in the new technology-oriented environment. This could require reviewing the way libraries do business and publicize their services. I see two major points the libraries can make.
The first one was mentioned by my classmate Jennifer Walsh in her earlier post: everything in libraries is free for patrons. That's an enormous advantage over any bookstore, even Amazon. Even if most information is online, it will not be free. There will always be some fee for downloads and for services.
To reinforce this unbeatable argument, libraries should better organize their services by making ILL delivery more effective and formulating more thoughtful database licensing policies. More detailed or more focused pathfinders could also be helpful in serving smaller niches. Better interfaces and OPACs reinforced by social tagging could be yet another way of reaching small niches.
My own experience this semester shows library's potential. I needed four books for the "Social Software" class. And I found all of them in libraries, in four different libraries to be exact. One was in YA stacks in the library where I work, one at a local library, and two came through ILL. I know I was lucky this time, but if small miracles like that become norm, the libraries will benefit from market segmentation.
Anderson, C. (2006). The Long Tail: Why the Future of Business Is Selling Less of More. New York: Hyperion.