I think a distinction needs to be made here.
Perhaps it's true that very few people who are buying Wiis would buy a PS3 if the Wii didn't exist, but I don't think that that means that the Wii and PS3 aren't competing.
It's true that the PS3 appeals primarily to die-hard Sony fans and hardcore gamers, while the Wii is much stronger in the casual market, but it's not like Sony doesn't want the PS3 to be strong in the casual market. They're pushing it as a BluRay player and they're trying to cut the price as fast as they can.
They're competing against each other for casual gamers in the same way that $1 apples compete with $2 apples. Many people who would be willing to pay $1 for an apple wouldn't buy $2 apples if they were the only choice. Likewise, people who are willing to pay $250 for a game console might not be willing to pay $500 for a game console. That still seems like competition, just poor competition on the part of the expensive apple.
And, of course, when the PS3's price comes down, it's going to be competing with the Wii from today. People who bought a Wii in the last year won't be in the market for a PS3 when it does come down to $300.
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