Here's another reason Apple should not drop prices to compete directly with cheaper Windows-based computers: the general trend towards the PC as a commodity.
Windows-based PCs already have many of the typical traits of a commodity. To the average consumer, most home computers are indistinguishable from each other based on their features. This is a problem. If consumers base their purchase decisions on price, you must drop prices (and drop margins) to keep up.
This article predicts bad times ahead for PC makers who do not escape the commodity trap. The author highlights the stiff competition Dell already faces in Asia from less expensive mass-market PCs.
What's the solution? To escape or avoid this trap, you must change perceptions. If a $199 beige box is perceived as a viable alternative to your company's $999 (or $1,999) offering, you're cooked.
When a $450 PC is "good enough" to meet the daily needs of a typical user, some serious work is required to convince them to buy a more expensive model.
Microsoft and its partners are trying to address the problem. They have positioned the "Media PC" and "Tablet PC" as products that are different (and, therefore, more expensive) than the average Windows-based machine. However, I suspect that this strategy is not doing enough to distinguish the premium products from bargain basement competitors.
Ironically, the widespread idea that Macs are very different from Windows-based PCs may actually be a strategic advantage for Apple. As Dell and its imitators move towards commodity end game, Apple continues to talk up the Mac as "digital hub" and reinforces the idea that Macs (not just Mac users) Think Different.
Should Apple drop its prices to compete with cheaper PCs? No.
See also "Are Macs Too Expensive?"