I think people are misunderstanding what Sony are hoping to achieve with the PSP Go. I don't think they are trying to make a blockbuster hit, at least not in the short term, instead they are preparing for the future. Everyone know and assume digital distribution is the path going forward, and systems like the iPod, various smartphones and systems such as Microsofts Zune are feeding into that belief.
I think Sony feelt that currently the PSP is fighting against the Nintendo DS. And my guess would be that when they looked at how the market would evolve, they felt that beating the DS would only give them a bigger stake in a shrinking market. Instead they need to prepare the PSP and Playstation brand for a future when things like the iPhone is the major competitor.
Sonys problem here though is that their current business is built on top of having a good relationship with sellers of packaged goods, like Gamestop and friends. This is important to maintain their current PSP business and for the future of their PS3 business. And introducing a device like the PSP Go is a good way to quickly sour that relationship.
So Sony is trying to balance. On one side they try to prepare their business for the future with building up a good online distribution system and on the other side they can't risk an all out war with their current retail partners. At the same time Sony is not in a position where they can afford sinking tons of money into something, so their efforts need to at least break even financially.
The result is what we see. The PSP Go launched as a first step for Sony to start moving their business to a pure online distributrion model, but at the same time the pricing of both the console and the games are set to a level meant to not aggravate their current partners to much. Microsoft had a similar issue when they did the on-demand games thing for the Xbox 360 recently, where the digital copies cost a lot more than you could get the games for through retail stores, I am sure the pricing was set to avoid all the game retailers deciding to favour the Wii and PS3.
So I think Sony is happy if the PSP Go ends up a moderate success, and something they can build upon to over time migrate their business to a digital distribution environment. I am also sure we will see the prices of the online games go down over time too. And at the same time the process is slow enough to not lose the goodwill of the retailers they still depend so much upon.
If they had priced the PSP Go a lot cheaper they might have had a meltdown in retailer support and would suddenly find themselves in a situation where no major games retailer would stock even UMD PSP games, and thus Sony's way to the market with the Go would be even harder than it is now.