If consumers didn't ask for it, then why do they keep buying more advanced consoles?
No one is putting a gun to their head telling them they must buy a PS4/XB1, you could just keep playing on your XBox 360/PS3.
And no "mediocre games" don't sell. Not even the ones with fancy schmancy graphics, there are many examples of games with nice graphics that don't sell well.
What's happened is the game industry as its matured over time and has become more segmented. The home console today, with everyone owning a large screen HDTV flat screen set (thanks to the break through of LCD/plasma displays that are picture thin) has led to the home console business to center around big spectacle games that take advantage of said TV.
Smaller scale games/pick up n' play games have now become domain of smartphones/tablets with a place on consoles via the indie scene. This is also an example of a change in consumer lifestyle technology -- the smartphone and table is something that didn't exist 15 years ago, just like flat screen TVs now allow every home/room (virtually) to have a large screen display.
When I was growing up in the 90s, a big screen display required a giant ass rear projection TV that took up a huge amount of space and was hugely impractical (and expensive).
But it's not dissimilar wha's happened to Hollywood movies ... there are less dramatic films and more big budget blockbusters, whereas back in the day you got like only 1-2 "blockbuster" movies a year (see: summer 1989 where Batman ruled the entire summer). The advent of computer graphics special effects made special effects driven blockbusters more plausible to be made, and that changed everything.
I do think with PS4 era graphics though you are reaching a point where virtually any kind of 3D environment can be rendered with a lot of complexity and look realtively good. You can go further yes, but the amount of money you're going to spend to get close-to-CGI visuals is largely not going to be worth it.
