After analyzing the cost of materials in both the Xbox One and the PlayStation 4, investment firm Wedbush Morgan has projected that the systems will retail for $399 and $349 respectively. Michael Pachter, an analyst for the company, has estimated that the materials cost for the PlayStation 4 is about $275, while material costs for the Xbox One are at around $325.

While the Xbox is expected to be around $50 more than the PlayStation initially, Pachter states that the Xbox could be offered at a subsidized price through contracts with broadcast providers or ISPs due to its compatibility with TV. In addition to the prices on the next generation consoles, Pachter also expcts price drops on the Playstation 3 and Xbox 360 of $50 each as a result of the Xbox One and PS4 releases later this year.

Pachter’s calculations do not take into account the willingness (or unwillingness) of Sony and Microsoft to lose money on each console sold. Microsoft, with over $50 billion in cash on hand, could clearly afford to subsidize console pricing if it so desired. Sony’s position is tougher, as the company is still trying to return to profitability and doesn’t have a lot of free cash.

Both console makers need to weigh the up front cost of losing money on each console against the long-term benefit of a larger installed base, sooner. Each unit of third-party software typically represents around $6 or $7 of pure profit to a console maker, so with a large enough installed base (and a large enough library of third-party titles) consoles turn profitable. That process usually takes years, though.

The danger of the opposite strategy, trying to at least break even on each console sold, is illustrated by Nintendo’s Wii U launch. While the console sold well over the holidays, sales dropped off this year due to a lack of compelling software . The sales slowdown is hurting Nintendo’s ability to generate enthusiasm at third-party publishers, some of whom have delayed releases of Wii U titles in response. Neither Sony nor Microsoft would like that situation to occur for them.

If indeed the console prices are where Pachter predicts, this will put more pressure on Nintendo to either cut Wii U pricing or improve the value of the Wii U bundle. Retailers have already been discounting the basic Wii U bundle in order to move inventory, as most sales seem to be of the $349 Deluxe Wii U bundle. We may have to wait until some time after E3 to find out the prices of some or all of these consoles, as each company tries to maximize its competitive advantage by finding out the opponent’s strategy first.