At the moment, Microsoft is easily selling out the half-million or so Xbox 360 units (there's no official number) for prices starting at $300 for the basic package. Why doesn't Microsoft price them at $700 instead?
1. By charging $300 they could also be raising the long term competitve price - The first wave of vidiots (myself included) have a relative inelastic demand for the product and might have paid well up towards $700. If people see all that excess demand at $300, they intuitively feel that $300 is a reasonable price given that the 'competitve' ebay price is much higher. This has the effect of increasing demand. I think Pops felt better about paying $X for the opening day seats at Fenway this year when everyone around at the game us paid $2 or $3X.
Plus when they drop the price to $250 on Feb 1. (my guess, based on various store's return policies), it will seem like a steal.
2. They make their money on games, (and probably the online subscription service) not the console. Don't kid yourself, your Box XCosts $300 now plus $100 or so/month in games.
3. Any publicity is good publicity. "Just How Bad Will The Great XBOX Famine of '05 Get?" newspaper asks.
4. Relatedly, scarcity can create demand - lines outside clubs, full restaraunts etc. If people are willing to wait for it, it must be good right?
5. This being MS, there's a good chance the first iteration won't work. At all. There is a non-zero chance that many will be returned on Dec. 26.
6. Have another piece of cheese Mr. LabRat...
update: A commenter in the original thread reminds us that $300 doesn't really get you that much (1 controller, no game, NO BACKWARDS compatibility, not 'net functionality...