'More gamers'
Traditionally Microsoft has aimed its games consoles at young men, but with Nintendo gaining success by targeting older players and women, the US firm has started to expand its audience.
"As we look to the holidays we want to bring in more gamers and lower the price for those customers," said Aaron Greenberg, head of Xbox 360's group product manager.
The basic Microsoft console with no hard drive or wireless controllers will be $20 cheaper, costing $279, and the Xbox 360 Elite, a model with high-definition video, will be cut by $50 to cost $449.
The move marks the first price cut for the Xbox 360 since it launched in November 2005.
As consoles become more complicated, and more expensive to make, firms producing them are loathe to reduce prices.
But analysts say the price cut is unlikely to make a big difference.
"It's not the price that sells the consoles, it's the games that sells the consoles," said Van Baker, an analyst with Gartner.
He added: "From that perspective, Microsoft is in pretty good shape."
