I cannot count how many times I've seen Nintendo derided for having stellar first-party support, as though this is somehow a bad thing that "discourages competition" and "kills the market", as well as other such nonsense.  And I'm getting sick of hearing it, as it is an argument which holds no economical sense.  Let's look at the myths and why they aren't true.

 Myth #1: First-party titles discourage competition!

Truth: Nothing could be further from the truth.  First-party titles set a precedent, which determines what direction the competition will go.  Without a precedent, the competition focuses instead on releasing titles which fill the desires of their fans.  The end result of such efforts is almost always the same: fewer sales for each new title produced.

Myth #2: Strong first-party sales kill the market!

Truth: Again, false.  Titles which sell well signal to third-party developers what kind of software to produce.  Whether it's a first-party or third-party title which gets those strong sales is irrelevant.  That it is first-party titles which are getting those sales reflects Nintendo's strategy of making unique hardware, then showing by example the basics of how to make games for it.

Myth #3: People only buy first-party titles!

Truth: Again, this is ridiculous, and sales numbers reflect it well.  Titles which pleasantly surprise people sell well, regardless of who makes it.  A good example is the Grand Theft Auto series, which is decidedly not a first party of any console maker.  Yet it was the defining game series of the PS2 generation.  Nintendo's success with first-party titles reflects them hitting the target market of the Wii well.  Brand loyalty is not even a noteworthy factor in these high sales; if a game fits the bill of appealing to the target demographic, and is advertised to that demographic, it will sell no matter who made it.

Myth #4: Nintendo keeps making all the ideas before the third parties can!

Truth: Another ridiculous claim.  The ways in which Nintendo has utilized both the Wii and DS are relatively basic.  In the DS' case, there are numerous titles out not from Nintendo which use the system in ways that no Nintendo-made game does.  In time, this will be true of the Wii, as well.

Myth #5: Nintendo's strong first-party position scares developers!

Truth: Maybe a few are scared of Nintendo.  But most are not afraid of the Big N; they're afraid of failing to appeal to the target audience of the DS and Wii.  Ironically, this is because they do not take advantage of what first-party titles do for them in setting the precedent for what people are interested in on the system.

Myth #6: Nintendo doesn't care about the 'real' gamers any more!  All their first-party titles are 'casual' now!

Truth: Quite otherwise; they care a great deal about the self-proclaimed 'real' gamers.  Which is why games like SSB:B, SMG, and LoZ:TP exist.  But their goal is not simply to bring new people into gaming; they want to help existing gamers adapt to the Wii and DS as well.  This is why games like Mario Kart Wii exist: to make a bridge between the old and the new.

I blame WiiFit.

It'll kill all third party softwares on the Wii.

excellent read, and very true.

Well put together post... Will probably go unnoticed, and argument will ensue

But,

+1 to Sky Render.

Generally agreed, OP.  Sony's excellent first party games show that it's not Nintendo's great first-party games that are the cause of shitty 3rd party games (at least unless you want to say that 3rd party PS2 games were as bad as Wii's, and that it was Sony's first party games that caused this phenomenon...pretty clearly not true.) 

3rd parties put out crap on Wii because they feel they can get away with it, and they were caught unaware by Wii's rapid success as a platform.  I actually think N should start rejecting crap games and telling the devs to go back and fix them before they can be released on the Wii.  3rd parties would jump if N told them to, in order to release their game on the Wii.  Even after fixing a game to N's satisfaction, the game would still have been cheap to make compared to an HD console game.

N's considerations should be: cost of inspecting 3rd party games and potentially pissing off devs vs likely income boost of having Wii 3rd party games be of a higher overall quality.  Maybe N would rather just beat the shit out of 3rd party games in sales, though, since they make more money per unit sold for their higher-quality 1st party games. 

Kudos to you.

You could have clearified a couple of your positions better but over all pretty good read.

While having more stringent requirements might help things in the short run, LHWB, it would cause issues down the road. In fact, a great deal of the developers during the PS1/N64 era switching to Sony revolved around Sony's freer licensing requirements. The myth that it was the format which drove them away is only true in an abstract sense; the expense of printing on cartridges was greater than CDs, but developers will do that if their software is going to sell on that system (which is why the DS and Wii get away with proprietary formats). There is a fine line you have to walk, between laissez-faire and extreme control. No company has ever found that delicate balance point for long, largely because it shifts constantly.

A big problem is that most developers have spent well over a decade producing games which followed a model of "higher production values". That model's been tossed out the door in favor of a model of "higher gameplay values", which is a jarring shift for a company whose biggest-selling titles cost millions and come with increasingly more complex interfaces.

Nintendo isn't trying to beat third parties; they're trying to help them by showing them the new values system which surrounds their systems. Some developers (such as various Ubisoft studios) are catching on. Others (such as Electronic Arts) are not.

@Sky Render
I agree with you in all.

Its not necessarily the strength of Nintendo's first-party games that cause problems, look at some of the multi-million sellers like Mario Party 8 and Big Brain Academy: Wii Degree, which cause problems for third parties, but the name recognition factor of characters like Mario, Zelda, Animal Crossing, etc. which draw people in over third-party competitors whose games might be similar in both type and quality but lack the same name recognition.

Even series with name recognition have yet to sell on a comparable level with a game like Super Mario Galaxy and Twilight Princess, albeit those two games are of higher quality than comparable third-party titles.