Yes, that's the point.
The 2020 MBA has a clear edge in absolute pixel sharpness (as it should, with the Retina display), but the 2020 MBA is displaying video originating from the 2017 MBA's camera. The fuzziness around my face, glasses, hallway objects, etc on the laptop on the right is not caused by insufficient pixels on the 2017 MBA; there are more than enough pixels on the 2017 display, it's just that what it is receiving is poor quality video.
Actually, the Retina display shouldn't really even be much of a factor: both laptops have a 720p camera, which implies that the video generated is 1280 wide by 720 high in pixels. The Retina display has approximately twice the resolution in both dimensions (2560 x 1600), so every video pixel sent to it over the communication channel is going to be displayed as a 2x2 pixel block of identical pixel shading - the Retina display can't make up information (on sharpness) that isn't in the original video stream, it can only replicate pixels to map them to the larger pixel count display. The 2017 MBA screen resolution is 1440 x 900, so it maps the video stream 1:1 to its display more or less, depending on window size. The end result is that on either display there is either one pixel (2017) or four Retina pixels all of the same brightness and color that appear as one approximately equal sized "virtual pixel" on the 2020 display.