I'd not say it's the market's fault but the technology itself and the gamers.
Technology because it improves the visual experience and thus you need to develop more complicated and challenging games.. textures need to have higher resolutions and everything has to be bigger, better and brighter to even get noticed.
Which brings me to the gamers themselves.. it's similar to movie development since the invention of the summer blockbuster. Audiences want an ever increasing factor of wow.. an assault on all senses and since this sells developers produce it which is also why we are getting the umpteenth version of a franchise instead of a groundbreaking new game (which usually are big hits prompting endless sequels).
Smaller games still do have a market and new possibilities exactly because of new consoles, be it MS's Marketplace or whatever Sony's version is named. There developers can release smaller games and cut out all the pesky physical production of the product and lower costs. Those games are not huge Call of Duty/Battlefield/GTA events but you can find real innovative games sometimes that do manage to find an audience.