[Developers are learning to price apps at a point where they make the most money, but I don't feel comfortable with the settling point many apps have reached (at around $5) -- that's too much. And give developers a demo option, like the rent button for movies.]
As an avid iPhone App Store consumer I can tell you that $0.99 is the no thought required limit. Games like iDracula, which I really enjoy, were a second thought.
On the other hand Fieldrunners took me a long time to buy (at $3). Fieldrunners is fantastic, greatest tower defense game I've played, but there have been MANY games I've passed up in that price range. More than 3 for every one I buy, without a doubt.
And it's not that certain games shouldn't be priced above $3. There are games in development that'll be worth maybe even $10.
But most apps are supposed to be quick and easy purchases and to buy all those racing games at $4-5 isn't worth it at all. $1-2 especially when you can recycle that engine quickly on another game and turn even more profits. Again at that price it's a knee jerk reaction, people love those.
This may all be based on my experience but also consider at that price it spreads word of mouth because more people play it = more sales. And now that we're not in such a crazy boom that we were in when the App Store first opened there'll be a chance to see more clear results.
Finally, demo/Lite games. I don't like having to go to another page to download the Lite version. I'm sure it's a pain for developers too. Keep it condensed, put a button on the App Store for demos right below the purchase button, just like they do for movies when you want to rent them.
If you've only downloaded the demo they should only let you put it a 1-5 star review. BUT if you've bought the App you're free to write a written review. I think that would clean the App Store up a lot.