Happiness Assassin said:
I have never been convinced by a demo to buy a game, but I have been convinced by a demo to not buy a game. If it fails to impress me in what is essentially a highlight, then it really can only go downhill from that point on. But there really isn't a way to gauge if a game that has a great demo can hold up across a whole playthrough, so I turn to other more reliable sources. Just my two cents.
Also Extra Credits did an episode on this a while back: http://www.penny-arcade.com/patv/episode/demo-daze [http://www.penny-arcade.com/patv/episode/demo-daze]
Pretty much this. Watch the episode.
Demos literally hurt sales. In order for a demo to be profitable, it must be a good demo, and the game must be even better than the demo. Any other combination (bad demo, good game, good demo, bad game, good demo, mediocre game, etc.) will hurt sales.
Just Cause 2. That is the only time that a demo has convinced me to buy a game. And even then, it only convinced me to shell out 2 bucks for it. For me, video game reviews were convincing, but nowadays, the sheer number of Let's Plays and whatnot are my main deciding factor for whether or not to buy a game.
Furthermore, demos are expensive to develop. They have to create a segment of the game containing the full working engine, yet only contains a level or two, and they have to figure out a means of distribution. Coupled with data regarding demos, it just isn't worth it.