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Biggest problem for Sony is that for everything Sony can do MS can counter and will counter.

Price cut: PS3 selling at a loss will sell at a bigger loss. 360 can also be cut in price and is profitable. 
Slim Model: First off I dont think people will give a rats ass that the PS3 is smaller.  Secondly MS is working on a Slim 360 as well and doesnt need to worry about the HDD nor a backlash if they keep the power supply outside the unit.
Software: MS can not only produce more exclusive software they can purchase exclusives.

Further MS felt they were in such a good position that they waited until September 2008 to finally bring the 360 down $100 from the original launch price.



Its libraries that sell systems not a single game.