I Don't think that a Price drop is enought for Microsoft, to achieve that, they already are 50US$ Cheaper, and are loosing by a lot, if PS4K, is 40000US$, there will still be the original PS4, for 350US$, and how Microsoft, can close a gap of more than 20 Millions of units ?, the Generation don't have enought time for Microsoft, to make a Comeback.
If they managed to make a 200 bucks slim, people could bite is, specially if OG PS4 stays at 300. And yes, there is time to close the gap. SNES closed a huge gap. PS3 and 360 didn't won, but they did a similar miracle against the Wii (with 2009 numbers, Wii should had outsold both combined, handily). But on both scenarios, I'm assuming that Sony would either screw up current owners or keep a high price on all SKUs. That's pretty much impossible. I wouldn't be surprised if they follow the PS4K at 400 bucks with either a slim PS4 closer to 200 dollar or at least a internal cost reduction on the OG unit to hit this mark. High-end consumers will be happy with the beefier unit while budget-friendly buyers will love the cheaper base unit. Everyone is happy and they make a shit ton of money.
So you are correct, it's a huge, huge gap. To lose this advantage, they would have to do a historical screw up.
This gen will last 7 years, like the last one, so we are mid gen yet. Sony is upgrading the PS4 because last gen the PS3 was getting his was whipped by low end desktop GPUs in 2012-13 and mobile phones were pretty close. With upgraded SKUs (PS4K will pack a bit more of punch than a GTX 960), they can avoid looking so outdated in the final years. Five year gens probably aren't feasible anymore because games can take 5 year to get done. Even with early dev kits, a lot of titles couldn't make this window. PS360 only got a load of big titles around 2009-10 and that was 3-4 years into the gen. I believe that they are rethinking how long a gen should last and that's the way they found to make a longer gen work while keeping the hardware as fixed as possible.
If we consider that PS4K will arrive in 2016 with the NX (maybe X1.5?), there is no way that we will see new consoles in 2018. Unless it's a PS4.7.