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EncodedNybble said:
I edited the OP hypothetical a little bit to avoid more "Sony will go out of business" replies since those aren't that interesting.

Would MS have to follow with a $100 arcade and a $150 elite? What would the Wii do?

Nintendo would price match and still sell the most.

Microsoft would probably kill the Arcade, and bring back the Pro at $149 to feature match.  They'd drop the Elite to $249 or $199.

Oh, and Sony would go out of business.