I don't game - I have an SNES emulator and Freecell game on my Mac, but that's about it. So excuse me if this seems to be somewhat ridiculous.
Why do games have to be proprietary? Just because they are open source doesn't mean you have to give them away for free. Let's think about what you're paying for when you drop $50 at the store for a game. You're not paying for the box, or the disc - that's like $2. What you are paying for is the artwork, the concept, and the long hard hours it took to make the darn thing, plus a bit of profit all around to all parties. I suspect that a somewhat restrictive license, saying that you can't redistribute the source in another context, would keep the games safe. The point of closed source is to protect the game engine and the artwork from being stolen, right?
Here's a metaphorical example. I have an alarm clock. It uses simple technology to display red numbers and transmit/amplify radio waves. On the bottom, there are 4 screws. I can take the screws out and take the whole thing apart, if I want to. With a bit of work, I can make the numbers blue instead of red. Or maybe increase the tuning power of a certain band, to get better reception. Now, when this clock dies, am I going to make my own clock? Hell no, that's too much damn work. It would take me literally hundreds of hours to make my own digital alarm clock from Radio Shack parts, even if I had another clock in front of me as a reference. My time is worth a whole lot more than the $20 it would take to just buy a new one.
So leave the game open so that developers can port the game, or adjust certain settings, or build their own levels. Actually, have the source available via CVS, and you have to be a development partner to log into CVS. That way, you can keep track of who is using the source, and prevent someone from changing tiny things and reselling the game. And you sell the game in stores - I don't think making the source available would reduce POS sales anymore than piracy already has. Hell, having Linux available for free over the internet has not hurt retail sales of Linux products at all.
I guess this would be less of an "open source" model than an "available source" model.
One last thing I would like to bring up. IF selling games was illegal, punishable by death, do you think that game development would stop? No. It just so happens that right now, the best and brightest of the developers happen to be getting paid for their work. But that doesn't mean that game development is dependent on the retail sales market - it merely means that dev is dominated by the retail sales market. You think these creative geniuses would stop making games if they worked at 7-11? I really doubt it. The fact that you can buy nice games in pretty boxes at the store is a side product of the gaming market, not the dominant driving force behind game development in general.