In addition to what Steve already stated, the retailers may even sell at near cost in order to get you into their store, where many will often use the opportunity to purchase something else that's not at such a deep discount. This is especially true now that saving trips to reduce paying for gas is so important to many.
I've also speculated about the non-competition with partners (retailers or 'channel') in the past. It appears that though they have begun to roll out an online store internationally, the prices are still closer to the full retail price, as the article linked below also seems to indicate.
Microsoft Starts Global Rollout of Retail Consumer Web Sites
http://rcpmag.com/news/article.aspx?editorialsid=9933
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