Sony can afford a substantial price cut, even though it is selling the PS3 at less than what the sum of its parts is worth. Sony is a huge international corporation with an extreme amount of disposable income, and would likely make back most of the money it spent on a price cut quite quickly.
Afterwards, the sensible business decision would be to quietly increase the price, even back to where it was. I'm not saying this would be a good decision for anybody else in the transaction (and I'm certainly not in favour of it). However, the benefit of lowering the price would be sales to hardcore gamers, who would know about the cut the moment it happened, rush out and buy the console within a year, and the same old speed of sale would resume soon after.
The reasoning behind that is that if the price cut continued after the initial rush, it would lead to a substantial loss in profit. Of course, even with a quiet and clever price rise, someone will probably notice, leading to an outcry and more anger from the hardcore (which won't decrease sales so much in the short term with hardware, but the long term with software). If that happens, it is a case of damned if you do, damned if you don't.
With all of that said, it is true that a price cut could lead Microsoft and Nintendo to match it, making the competition still more appealing by the same amount. That's the wild card of the situation, and unfortunately it isn't something Sony can plan for, since it can happen at any time. Sony has to just got to play its Ace and hope for the best.
This CEO, while fairly engaged in his PR work, doesn't appear to understand market psychology in any depth. That's fair enough, though. That's often not a CEO's job.
