The 120Gig SKU might be discontinued, that would be the only reason that the larger capacity unit is the same cost at retail - it being the current standard base model at the MSRP for the base model.
Repair/replacement cost for an out of warranty unit from Sony will be less than buying a new one and they currently guarantee that you'll get the same make/model back up to and including launch day 60 gig units, however, since PS3s are heavy, the most cost-effective method to ship the unit to them will also likely be the slowest.
Sony does sell 40 Gig fat refurbs at certain retail outlets for $200 but for that cost you can probably do a shipped repair on your existing unit with Sony and retain your B/C features.
*edit* They'll also transfer the complete contents of your HDD over to the repair/replacement unit during a repair/replacement if the drive on your current unit isn't borked. So, that's another benefit of going with Sony for repairs.
*edit edit* The above may not be a standard feature of repair services, so, best to disregard it as a part of your potential decision making process on what to do.
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