Just because people buy it - does not mean it is correctly priced. Millions of people bought pet rocks and Ashley Simpson CD's
Things are priced at what the market will bear. Factors can influence this. A market leader can get away with charging higher prices as in the iPod's case, but that price is still the correct price according to the market. Cheaper players have been out long enough for the market to correct for a too-high iPod price.
The exception is monopolies, which can charge an amount far higher than the market is willing to bear, but must bear because it needs that commodity.
Obviously you slept through your course in microeconomics... or the class in business administration where they discussed price points.
If the iPod were overpriced, millions of people would not be buying it and Apple would be stuck with warehouses full of unsold iPods. Apple is hard pressed to meet the demand. iPod Shuffles are sold out at Apple stores within an hour of shipment arrival. iPod minis had the same problem when they were first introduced. Apple is selling every iPod they can make... and HP and other companies are getting on the band wagon with "branded" iPods selling at either the same or higher prices.