Ok, time for a quick Consumer Marketing 101: the lower the price point, the bigger the market you reach. As such, there are no critical price points, it all comes down to the perceived value vs. the price.
Considering the console race, the winning console goes up in perceived value, being the one getting the most software, so you get a positive feedback loop: increacing perceived value leads to increasing customer demand which leads to increasing hardware sales (provided there is supply) which leads to increased software sales and development which leads to increasing perceivde value and so on, until the point of saturation, which depends on the price point.
So, in essence, what companies are doing when they are lowering prices is improving the ratio of perceived value vs. price AND increasing the size of the potential market. What makes all this so interesting is that the relation between price and potential market size is not inversely linear, so halving the price does not equal to doubling the market size, it perhaps quaqruples the market size, or even more. It could well be even an exponential increase.
What does all this mean for the console manufacturers this time around? Simpy put, Nintendo is in the best position by far: the perceived value vs. price of Wii is clearly better that that of X360 or PS3, and their price point already opens up a bigger market for them. When they lower their price, probably both the percentage and absolute increase of the market size is much bigger than what a similar price cut would do for the competition. Since Wii obviously has such high perceived value and a lower price point, X360 and PS3 would have to match the price point and have at least similar perceived value to be able to compete in the long run. If the Wii can maintain the lowest price point it will always have the biggest market to sell to, so it's a really tough situation for both MS and Sony.
