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Where do people get this idea that MS are dropping prices so much?

At this point in time in last gen the PS2 and Xbox had gone from a $299 launch price to only $149, while in this gen the Arcade is still $199 (and €179 in Europe). And the HDD equipped unit is even pricier - at launch it cost $399, and today you still have to pay $299 (€239 in Europe) for the high-end SKU.

So the OP has it back-ways. Because actually MS should drop it's price more. The Elite 120GB with DVD instead of Blu-ray shouldn't cost the same as a PS3 120GB with Blu-ray.

The problem in this gen for MS is that they're unable to make savings on their console and thus unable to drop the price as much as is necessary.