This is quite specific to the console space - closed ecosystems where the bulk of profit is coming from their online game store, their services etc. If they felt it was necessary (as Peter Moore said happened with 360), the can undercut to get customers onboard. Then make up money later. Build cost goes down over time, so it would only be a temporary measure.
Lets hypothetically say XSX cost $559 to build and PS5 cost $499 to build. Ideally they'd want to make a profit, but no one wants to spend that amount on a console, so they'd ideally then want to sell at cost. This would be controversial. Depending on how each see it, they could make an early loss till build cost goes down, but how far down can they go. MS according to Peter Moore, can definitely go a fair way if they need to, and he doesn't think Sony would be able to go as far (his opinion from the vid I posted earlier). He also suggested MS will want to push Sony to announce price first. They'd want to change the narrative after Xbox One and be more price competitive. So for all we know PS5 may end up at $449 and XSX might also be at $449, with MS taking a bigger hit to be competitive with the arguable "more powerful system". Maybe it goes the other way, and PS5 gets a $499 tag and MS go lower or the same, who knows