The Commodore 64 was still selling well into the late '80s outside of Canada and the US.
Yes, I'm well aware of that- I live in the UK and already said that myself elsewhere!
The Amiga 500 and its peripherals were simply too expensive for many people.
Yes, I know- I was one of those people; I didn't get an Amiga until the early 1990s.
So there was definitely a market for a cheap, entry-level home computer below the Amiga.
Yes, it was called the Commodore 64! (Or its rivals like the ZX Spectrum, or the Atari XL/XE, which I owned).
And while I did agree that a C65-like machine would have filled a gap in the market, that isn't what you were claiming originally; you were saying that a C65 would have rendered the low-end Amigas unnecessary.
And there is a good chance that the Commodore 8-bit series, if it kept going, would have morphed into an 8/16-bit system like the Apple II series did with the IIgs.
Maybe it would have, maybe it wouldn't. But I doubt that it would have been as good as the Amiga if it had morphed, piece-by-piece into a 16-bit system, and I doubt that system would have worked out any cheaper than the Amiga 500 by the end of the decade if it was comparable in power to the latter.
The Amiga was better than the PC partly because it was designed from the ground up (both hardware and OS) unlike the PC, which was built from off-the-shelf parts, used a 16-bit knockoff of a famous 8-bit OS and had lots of complex kluges plastered on to workaround the workarounds for the workarounds for the limitations of the original design.
As for the IIGS, yes, from what I heard it sounded like a very nice machine, and IMHO Apple should have based the Mac OS around that hardware instead of having two separate lines. But it wasn't a cheap machine (mind you, neither was the Apple II). Maybe I'm biased because I owned an Amiga and never owned a C64, but I think it's pretty clear that while an improved (8-bit) C64 would have been worthwhile in the mid-80s, it would have been a poor choice to rely on that instead of the Amiga for the long term.