This has very little to do with anything other than the ability to make price cuts and match price cuts.  Which I agree tilts the scales to some extent into Microsofts favor. 

Still though,  Sony still has a higher perceived value which works in their favor.  I don't really forsee the perceived value changing. (Atleast not until the next generation).   Sony has the upper hand with overall price.  Sony still has the ability to hit the 100$ 200$ 300$ price points.  (Which are all very attractive for sales).  Microsoft has painted themselves to essentially $100/$150.     As long as Sony maintains a higher perceived value and they stay under what appears to be that $200 limit,  I think they will do fine. 

Like I said though,  their biggest problem remains how quickly can they get down to a reasonable price ( I would say 300 and below is reasonable) before they lose more of their marketshare than they want to (To the 360). 

Time certainly will tell.  I don't think a 300$ PS3 is the end all be all for Microsoft or Sony.   I do think it will tremendously lower the sales gap weekly with the possibility of slanting them in the PS3s favor.  Sony has to just keep up their perceived value in the consumers eyes with quality game titles and constant improvements to their network and other things.  If they do this,  their price dis-advantage currently will over time become their price advantage.

I don't think anybody doubts this, the only question is if their countermeasure will work. Honestly, unless Microsoft can match Sony dollar for dollar with a price drop, I don't see the 360 likely being able to outsell the PS3 it it drops to $299. 2008 showed us quite clearly that the PS3 can significantly outsell the 360 when the difference was $120. Even with 360 at mass market price, I don't see what would keep PS3 from doing so again if the difference was only $100 or even $150 if Microsoft issues a $50 cut for the Arcade model.

The only way I could see 360 continue to outsell PS3 if it drops to $299.99 is if the 360 dropped to $124.99 or less, but at that point Microsoft would be screwed for the rest of the generation because they likely wouldn't be able to drop the price of the system ever again for the two to three years it still has left before Microsoft launches their next system.

i think the hard drive bundled with a $179 arcade unit would get them additional sales

The percieved value aspect is something which changes with time. It relates to the price of the competition, whether or not your friends have an Xbox/PS/Wii and whether or not people are familiar with a particular brand and what services a particular console offers which is of interest to people. Blu Ray may become more valuable or less valuable with time depending on the adoption rate of players. The people who already have a player now aren't likely to be swayed by this PS3 feature for example and people who are wary of upgrading are also less likely to be swayed by it as well. As an absolute, the cost of the players are coming down so the value it may bring to the PS3 may very well be diminishing.

There is a very real question of whether or not Sony will be cutting the price of the PS3 by a full $100 amount this year. They could easily cut the price by $50 and maintain their present/previous years rate of sales. Furthermore even if they cut the price by $100 per year for the next two years it will be well into 2010 before they can hit that $200 price point. Furthermore the further one looks into the future the less certain any projections become. I doubt anyone can say at this point with certainty the dynamic which will be present in two years time.

Well this is a bit pre-mature, but, if Sony doesn't drop in April then I guess Sony isn't going to drop this year unless they change their mind come the holidays. However, if they don't ride the holiday boat then they can always drop next spring when sales start to die again.

brace for quick defeat seems the most logical.
truth is "playstation" is still a vary powerful brand, it rivals the likes of ipod, Wii, game boy, Pepsi, coca cola etc..

x box doesn't have as much recognition.

Regardless,  Sony has to make a choice. A 50$ price cut, twice in different strategic spurts might be intelligent.  Or it might not be enough to encourage the sales they hope for. 

The reason why I believe the percieved value argument to be changable is because the greatest positive or negative factor for consoles is the word on the street or word of mouth. Its quite a significant reason why the Wii is in front and will stay in front and why the PS2 had such a commanding lead over two very similar and effective competitors. The network effect is quite an important reason to explain why Microsoft can continue to pick up a high % of internet connected gamers in spite of the fact that PSN is free as the most valuable network isn't the cheapest or the most feature packed but the one which your friends decide to use to most people.

The percieved value of a $400 PS3 now is quite likely lower than a hypothetical PS3 2 years ago. things have changed positively for both Nintendo and Microsoft and negatively for Sony and this will continue to be the case for the forseeable future. The longer Sony remains outside of the price bracket of people, the more they will begin to consider alternatives so even if they do cut the price theres the factor of people who have yet decided which console to purchase have allowed the possibility of purchasing other consoles to come into their mind.

Im not exactly sure what would happen if the PS3 recieved a price-cut to $300 tomorrow. I don't know how much pent up demand is there from people who only want a PS3 and I don't know what kind of price elasticity of demand the system has as the console price approaches the sweet spot. There is a very real factor also of people who cross shop between the two systems as they are effective substitutes we can see a lower 360 price eroding PS3 sales and vice versa. I throw up my hands at this idea because its simply too complicated to even guess at the dynamic without hard data.

In terms of strategy, Microsoft has many options available to them. They can not only cut the price, but they can add features such as wireless or additional flash memory for the Arcade which may alter the balance of the SKUs quite significantly. They are playing their cards close to the chest here which is an incredible pain in the behind. They did give us something which is they are gunning for 2nd place and they will probably go to great lengths to secure that placing. This is why I predicted Microsoft would outsell the PS3 in the last holiday season.

Didn't the PS3 outsell the 360 in 2007 and 2008?

I'm not too sure on 2008 though.