A Microsoft representative has confirmed to Joystiq that a $199 version of the new "short" Xbox 360 will be available this fall. Kotaku recently reported on a retailer document revealing the cheaper version of the console, along with a SKU containing both the new Xbox system and Kinect. Microsoft declined to comment on the Kinect bundle or offer any further details of the $199 model (beyond the price and release window).
At least we now know that Microsoft isn't crazy and hasn't completely given up on having a $199 Xbox 360 to pit against the Wii. It also makes sense that a $199 "Arcade" version would be on the way, given that retailers like Amazon still refer to the new 250GB model as the "Elite."