Your critique of his marketing is spot-on, but I think his analysis of why the prices are so low and why people will only pay that much is still valid. His problem is mainly marketing, but the pricing issues affect every app.
I don't think he addressed THE main issue from what I can see: utility. I pay $2 for a single bus ride because it has high utility to me (going somewhere is important), and similarly I have paid $5+ for iPhone apps that I thought I would use regularly and would provide a good benefit to my life.
His game, like most iPhone games, provides low utility. It would at best be a 2-minute distraction while I wait for the bus. In other words, it provides a minimal utility that I can live without. This drastically lowers what I'm willing to pay.
If a game offered the immersive, cinematic experience that a movie does, then yeah, I'll easily pay $10 for it. The Mass Effect game for example is awfully tempting.
But as it is that is not what most iPhone games are. Most iPhone games are time wasters so you're not interminably bored at the metro station - that to me is not a high-utility use case.
The amazing nature of humanity, and business, dictates that most people are not you.
You must be shocked daily at what other people choose to spend their money on.
I make a living off this very fact, because nobody else in my field has the balls to presume that people would spend money on their stuff. (And I can shout about it all I want on HN and know that nobody will ever use my "secrets," because they'll never believe it.)
