Sony is in a comfortable position in this new price war, as the PS2 has a healthy installed base. While competitors still have to worry about reaching a critical mass to secure content and users, Sony's profits from games already offset the cost of hardware and R&D. It can now engage in a battle of wills with Microsoft and Nintendo to maintain its consoles leadership.

But Microsoft seems equally willing to dig into its deep pockets, rather than give an inch to Sony. Although this price cut will further deepen Microsoft's console losses, it cannot afford to be outpriced by Sony just a few months before the crucial Christmas period.

The buzz at this week's ECTS European games trade show is all about the impact of these price cuts - and about Nintendo's reaction. The manufacturer has stated that it has no imminent plans to lower the GameCube's price, which seems to be a sensible strategy considering the price advantage that the console has.

Even now, the GameCube is the cheapest console on the market, and if Nintendo lowered the price further it would probably have to reach the next psychological price point of E150/GBP99. This would leave Nintendo with little room for another price cut for a console that's only a few months old in Europe.

It's also worth noting that Sony's price cut has come early: manufacturers normally cut prices around Christmas, to boost demand during this crucial period - so there's a reasonable chance of yet another price cut later on this year. Can Sony afford this? Would Microsoft follow suit again? Would Nintendo be dragged into the price war? The answer to all of these questions is most likely to be yes.