In short, the answer lies in the marketing.
You can buy a high end smartphone for $399, with the bare minimum storage (non expandable). The manufacturer is happy to sell the same phone with more internal storage at an inflated price. Apple adds $200 to the price to "upgrade" from 16GB of barely usable storage to 128GB. This does not change the bare minimum SKU, it simply allows the manufacturer and retailers who sell the device to say the phone costs $399.
During the 7th generation, both MS and SCE attempted a similar SKU structuring by the third hardware refresh, effectively stripping the specs (in this case, the HDD) in the interest of selling a bare minimum MSRP SKU. It's arguable that both companies did the same thing with the initial SKUs with the Xbox 360 Core and PS3 20GB, both of which were limited in use due to the cost cut packages in the interest of providing those lower tier entry priced SKUs.
What's interesting about the 8th gen is that only Nintendo offered a stripped down SKU initially, whereas MS tethered Kinect to the XBO with a single $500 SKU. SCE offered a single $400 SKU and the rest is history.
You can sell a $500 console; there is a market for one, provided what the consumer is getting for that price is perceived to provide a cost/yield benefit, typically in the form of specs which should be directly tied to real world performance. However, the market for $500 consoles is much smaller than the market for $400 consoles, meaning the manufacturer would be wiser in offering that $400 option, without hobbling the performance.
I'm more of the notion that manufacturers simply maintain the same price while taking advantage of current advances in processing and memory capabilities, rather than continuing to manufacture the same dated ICs using cheaper manufacturing processes and passing a portion of the savings on to the consumer.
It makes less sense financially to sell that same updated hardware at a significantly higher price as this automatically shrinks the potential consumer base, unless the manufacturer is deliberately attempting to sell a smaller niche product, typically by marketing it as a "premium" product.
Great post, I agree with this. I remember always fighting back when people use the tired, old argument that 199$ is "mass market price", when the truth is that anything is mass market price with the right marketing, and smartphones have showed this in earnest in the past decade or so. The modern, highly convenience driven market, craves products that can be tailored and have broad area of use and features, most of all, they are also a lot more sensitive on format and direction rather than actual, sheer technical content and prowess (even relative to price).
End of 2016 hardware sales:
Wii U: 15 million. PS4: 54 million. One: 30 million. 3DS: 64.8 million. PSVita: 15.2 million.