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The_Liquid_Laser said:

Smaller studios have to up their budgets on more powerful platforms, and if they don't sell enough then they go out of business. 

No, they don't have to. Nobody is forcing them to up their budgets. They can ignore the AAA competition and release a game with smaller budget on PlayStation or Xbox... the same as when they release a game with smaller budget on Switch.

There are fewer games made each generation...

Are there really made fewer games every generation? Maybe for some specific platforms if you only count physical releases. But in total more games are being released than in the past and the output of good rated games has been quite constant:

...and the biggest budget games gobble up lots of the sales.

As they always have. On Switch the first party games also gobble up lots of the sales.

And for every indie game Nintendo promotes there are also 50 - 100 indie games which aren't promoted. They have to make their money by huge eShop discounts (80 - 95%) to get some visibility.