Now why did you have to bring the whole fanboy thing into a perfectly rational conversation?
Sorry if I called you a fanboy abev, it's just that "Wii is a Fad" phrase has become the official slogan of the Sony Defense Force so you can understand where I'm coming from.
When I talk of price drops I dont mean current price drops or price drops next year or even the year after that which will decide which console ultimately sells the most.
Im talking about four or five years down the line.

I'm a little confused by this statement. You're saying that the PS3 sales will start to improve four years down the line? Four/five years down the line is when the mass market are buying consoles and do you really think Sony will be able to drop it's price to the mass market $200 price tag before it's rivals can? Something you need to realise is that the mass market make up most of the PS2's user base and they are not brand loyal. If something more exciting comes along they'll jump ship (in this case that's the Wii b/c it has fresh new way of playing and a low price tag). The PS3 is $600 so by the time the it can be a viable option to the mass market it would be too late as the winner would've already been decided. Consumers and game developers will obviously choose the winner.
One thing you need to learn about the gaming industry is that to win you need to start off well from the beginning and take advantage of your rivals weaknesses so that by the end no one will give second thought as to what your rivals have. Sony has to take action now if doesn't want to sit in third place but in order to do that they will have to make major sacrifices and looking at the financial troubles they've been facing lately I don't think that's a possibility.
The ps3 will be in the same situation that the ps2 is currently in, It has a very long shelf life and a mass of loyal followers, and so when the ps3 reaches dirt cheap prices it will continue to sell well even against the next nexgen consoles as the ps2 is currently doing.
No. The situation this generation is very different. When the PS2 launched it had alot of hype and it's only rival on the market was the Sega Dreamcast and that console was already on a downward spiral anyway(it didn't even have support from EA). The PS2's true rivals, the Xbox and the Gamecube, were only launching a year later giving it a year without any real competition. By the time they launched, the PS2 was already far ahead which meant third party developers didn't bother with them and that is one of the reasons the PS2 has such a huge library of games today.
This generation the PS3 had to launch a year after it's biggest rival, the Xbox 360, and all of it's hype was quickly overshadowed by it's other rival, the Wii. Add to that a $600 price tag and it would take nothing short of a miracle for you to be successful when so much is going against you.
If you forget everything you currently know about both consoles and go to another world where both were released at the same at the same price, I dont think this whole war would exist. Sony would be triumphant by a mile, this may be purely due to sony marketing and followship but its the truth and thats why I believe that once the ps3 can compete in terms of price it will over take the other consoles.
Now you're just speculating. The PS3 did launch the same time as the Wii but it didn't come at the same price and that played a major factor. Realistically the PS3 is not doing so well and the market isn't going to wait for them to catch up. They will move with what benefits them the most. With regards to third party developers, who play a big part in deciding a winner, most will opt to develop games for the Wii over the PS3 b/c software sales on the Wii are better and it's far cheaper to develop for which therefore means creating more games at a lower cost with greater benefits. Of course you realise more games = more sales b/c thats what the majority consider when thinking of buying a games console. Brand loyalty goes out the window when money's involved.