Pricing
Microsoft and Sony currently use a loss leader strategy, pricing their consoles lower than the production cost to increase the market for more profitable sales of related software. Competition between the two companies in 2002 has caused them to further reduce the prices of their consoles, the then prominent Xbox and PlayStation 2 respectively. The latest Xbox 360 and PlayStation 3 consoles still use this strategy.
Nintendo's Wii console, despite being several hundred dollars cheaper than the Xbox 360 and PlayStation 3, generates profit from every sale because of its lower production cost compared to its counterparts.
Read more about this topic: Console Manufacturer