Microsoft did not cut the Xbox off to boost sales of the Xbox 360, they did it (and several months before 360 even came out) because they were losing money on every Xbox sold and wanted to cut their losses.
Microsoft used the xbox to gain marketshare. They knew it was going to be a money pit and weren't planning on making money that iteration.
Microsoft had a spat with Nvidia and couldn't get new video chips after 8/2005. Thus they were unable to produce any new systems without a major redesign with a new chip. They chose to just push the 360 through production as fast as possible leading to the RROD issue.
The thing is Wii U is backwards compatible with the Wii...so you really don't need the Wii on the market to add to confusion.
I disagree. The Wii could easily be had for $100 last holiday season. The Wii-U lowest rumored price is $300. The Wii-U will have a limited selection and few cheap games when it launches. The Wii (despite the drought) has a bunch of games that are good and low priced. There are lots of reasons to buy a $100 Wii instead of a $300 Wii-U and one is you don't spend $300 on a system that doesn't have games that you don't want just because it exists.
I also don't get the market confusion thing. How many Ipad and Iphones are there? Consumers are used to different iterations. And if they weren't, they surely will ask an employee why the $100 Wii is cheaper than the $300 Wii-U.
From a financial perspective there are benefits since Nintendo needs to sell their new model to get games to be profitable on their new system. They also should make a bigger margin on the Wii-U than selling a Wii unit.
But they'll have to be careful about losing the budget minded consumer. The Wii is the budget console right now. When the Wii-U comes out it will certainly cost more than the PS3 and 360. Having the Wii available still allows them to pick up the market where cost is still the biggest factor.