A lock-out chip is a tiny piece of computer stuff that tells a game console what games it can and can't play. It's like a special key that only lets certain games in.
The game console has a little computer inside that talks to the lock-out chip. When you put a game in, the computer checks to see if the lock-out chip says it's okay to play. If it is, you can start playing. But if it's not, the game console says "nope, can't play that one" and you have to try a different game.
This lock-out chip was put in game consoles to stop people from playing games that the console makers didn't want them to play. Sometimes this was to make sure the games were safe for kids. Sometimes it was to make sure everyone paid for the games they wanted to play.