True, there was always a place for nice low priced home computer, that could run good apps and play multiplayer games (I remember PC gaming in that era as a lonely hobby, before netplay became common much later).
I'm not familiar with PC prices of the era, there's a few price guides in ACE magazine. I'm interested in this, but can't find many figures. I expect even an amstrad 386DX with vga would still be more expensive than the 1300/1400 . But come with a monitor and HDD, which would make it more competitive.
I don't see consoles as a red hearing. Rather the low end Amiga's were a Trojan Horse. It sucked gamers in, and spat hobby computer users out. I know many in the UK and Europe bought the Amiga as a games machine (I did), but then discovered it's other joys You can't discount how important that was.
Many of my friends either dumped their home computers for consoles, or got a PC, or both. This pretty much happened in '94 '95. Low end Amiga's (which were the majority of sales) were, like it or not, stuck between the PC and the consoles. It could have been an advantage, but the lack luster A1200, and the overpriced A600 turned out to be otherwise. If Mehdi Ali (cursed be his name) and given the money and resources needed, it could have been so different. Just my opinion of course

Also, would the A1200 have been discontinued? If not, you end up in a Falcon/STE situation, developers writing for the lowest common denominator.