There's a lot of good replies in this thread. Myself, I believe that without used games (and to some extent piracy), the game industry would be better.
I think that we would be a lot smaller overall...ALOT smaller. Without used games getting tons of people into games in the first place (through discounts, or through obtaining a copy from a friend), there are tons of developers that just would not have gotten into the industry. There are a ton of people that wouldn't have bothered playing games, because they would be just too expensive (the first copy of Zelda I saw for sale in a store was over $100!).
Because of this, I think we would have remained more of a niche hobby. Without the "millions of gamers" mentality, the big players, the EA's, the Activisions, the Ubisofts would not have become the megaconglomerates they are today. However, on the flip side, I think that technology-wise, we would not be nearly where we are today. I think we would all be rocking a PS2-level machine, and that's being conservative. The drive for better graphics is also a drive born of competition, in this case a desire to push people towards new and better systems that have newer and better forms of DRM. Without the threat of Used/piracy, DRM would not need to exist, thus the push to drive them towards a new and better system, would not be there.
I think that we would have more original games, and far less sequels. There would still be sequels, but without megcorporations and megablockbusters, and with a lesser technology base, there would be less of a need to stay stale and repetitive. Developers would be inclined to try something new and different in order to capture sales, rather than just graphics upgrades.
I also think that price would be an issue for lots, but I do think that most would be priced according to quantity, not generation, so to speak. I think that there would be multiple price-points for different styles of games, which there should be. Should Bejeweled be a $60 game? How about Plants vs. Zombies? Final Fantasy? Grand Theft Auto? R-Type? All of these games are very different, and yet when released as a disk on a system, they all have a base price point, which the manufacturers suggest they be priced at, and the major publishers generally follow (or raise from). Thus everyone follows suit. Without the over-reach of EA or Activision, publishers and developers can charge closer to what the actual value is, so games would be all over the road map, but this does mean that your AAA blockbusters would be priced somewhere ridiculous, while everything else would trickle down from them. Games that try to pretend they are AAA, but in fact are lesser games will quickly drop in price, while games that are good will rise (due to lack of availability). They aren't printing as many of these, you know.
I am unsure if Steam would even exist, without being born out of necessity so to speak. Would there be a push for a Steam-like service without the need to go digital only? Without PC games being pushed out of the isle at Wal-Mart would a digital service be needed? I think that there might be rumblings for someone to try something like it, but I don't know if it would catch on. Although without the threat of used games, people would look at it as a source to get games more legitimately, but conversely, without the used game threat keeping prices down, prices digitally would be a lot worse. No Steam Sales for example.
Overall, I think it's an interesting "What if...?" to talk about.