Absolutely not. Splitting up the market between mutually exclusive options is not competition, it is cartel tactics.
It's how everyone in the market is competing in a bunch of different spaces, like streaming services. It's still increased competition, even if it sucks. And I do think the market would be worse with one high-end console than two.
You shouldn't get too comfortable with what Microsoft is doing this just because as a game company it's in third place.
I'm not comfortable with it. I'm just less comfortable with Sony having such a wide lead in a market with only one other competitor, and given that exclusives are how Sony made that lead, exclusives are how Microsoft is closing it. It doesn't matter how much bigger Microsoft is. Their success comes from other markets, and they're one of only three companies making a console, so that market can't really afford to lose a company in that race unless we're willing to lose consoles altogether. (The way PC gaming is trending, one day we might be, but that's optimistic.)
Sure I do hope that other smaller publishers grow to take that space, but will that space even be available, considering your suggestion that people might choose to buy a XBox and play those same games?
I don't follow you. Smaller third party publishers are thriving and growing, and they're multiplatform. The larger publishers are shrinking their year-on-year offerings and looking for buyers, of which there are few that can afford such a purchase.