You have many good points there.
I personally, have always reacted when people argue with die-size, transistor-count, yield (and other manufacturing costs). Because as you've mentioned correctly "costing around 35$ thats not a big deal...". The real cost is in R&D, PR, sales and such. Manufacturing cost is not a big chunk of the total cost. and that's why the sales-volume becomes a really important factor.
AMD could make a bigger 6970 chip and beat/match 580 actually. They could double the transistor-count (for only 35$ +/- some, not a big deal) without hitting the heat or power usage wall. They could easily spend 35$ (+/- some) and do it, but they underestimated the flexibility of Fermi-architecture. They thought 580 was a 480 + "minor"-improvements, and they wouldn't need more to beat it. they didn't expect such a good 580 really. That was the first mistake in this round.
The second mistake (and even bigger) came when they released 6950-1GB. They spend time and money to make a "change", but they chose to "degraded" the 6950-2GB and use it for a mainstream-fight. In my opinion, it was really bad move, they should somehow (i dunno how) "upgrade" the 6970 to take a fight with 580. This move didn't beat 560, but created a big mess for them too. Now they have many cards that "performs the same for most gamers" on their hand.
nVidia did a really good job with 560. They got the upper-hand over 6950-1Gb/2GB, in performance/OCing/power-usage for most gamers, and they priced it under too, at start!
But the mainstream is not about performance-crown, its' all about price/performance-ratio, and as you mentioned, AMD can still drop the prices and put up a good price-fight. They made a good attempt already at the first day of 560-release, but it will be interesting to see nVidia's counter-attack.
AMD may get problems following nVidia in an aggressive price-war tho, because 560 is a mainstream card, and has been developed for a "cheap" marked, while AMD is using those "degraded" high-end cards to fight. It will be interesting to see how far they can follow nVidia in near future.
It can get really ugly, depending on nVidi's resistivity. 560 got a good price already, but I'm still crossing finger for $199. It will be interesting to see that

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