Balance in my mind is one of the most important elements of game design as without it a lot of the game experience can be ruined. When it comes down to it in my opinion, difficulty levels destroy balance. The favored change when adding difficulty levels are stat tweaks, all of a sudden enemies will hit harder or you hit less and etc. To me this is a cop out in terms of balance and I've seen many games that hit that sweet spot of balance to only be ruined on the harder difficulties.
Playing a game on hard doesn't mean breaking the game design to create a challenge. Nor do I find it fun when the only difference in playing on the higher difficulties is that I'm doing the same exact thing but with my hands tied behind my back. Thinking back to God of War 1 and 2 on titan difficulty (expert) there are several sections that were just plain horrid to play on expert when they were just bad on normal and hard. My problem is that I think I have a different definition of the use of difficulty levels compared to most designers.
To me difficulty levels are a way of tailoring the game design to different groups of gamers. Thinking back to Theme Park all those years ago, each increase of difficulty would affect what game systems you had access to. That in my mind is the perfect use of difficulty settings, opening up or closing game systems for advanced play so that the player can get use to the game before opening up the whole can of worms. The less stat tweaking that goes on in going up and down difficulty levels the better in my opinion.
Recently with Little King Story, the only difference in playing on hard compared to normal was that everyone had less health, which for a game with less then precise controls made things too frustrating. There is one genre that I avoid playing on higher difficulties other then normal and that is the RPG genre. As it always seems that the difference is that instead of grinding for 2 hours to beat a boss, it becomes 5 hours. Looking at games of this decade I can think of 2 shining examples of difficulty levels and strangely enough they are both from the same genre.
Fluctuating difficulty: First is GodHand one of my favorite PS2 titles and an example of letting the player's skill drive the difficulty. In GodHand you can always view how the hard the game is by a level indicator in the corner. Going from 1, 2, 3 and level die (super hard) each one increasing the difficulty of the game. As the level goes up enemies will react faster, do different attacks and new enemies may show up at different parts of the game.
The interesting part is how the difficulty level changes. As you hurt enemies and avoid taking damage (aka playing good) the meter will increase and when it fills up your level goes up. If you keep on taking damage or die (aka playing poorly) the level will go down. You can also increase or decrease the meter by taunting or bowing which are actions the player can do. The game rewards the player for playing on the harder levels by increasing the cash reward for beating tougher enemies which can be used to buy upgrades and moves faster.
Game Rewrite: I've said it before and I'll say it again, Ninja Gaiden Black is my favorite action game so far and one of the reasons for it is how well they nailed the difficulty in my opinion. Yes the game was incredibly hard on even normal or easy mode for some people, but the game was only as hard as your skill at it improved. Team Ninja faced a dilemma when coming up with the difficulty levels, what could you do to make an even harder game, harder?
The answer was that each difficulty level basically rewrote the game forcing the player to adapt. The player will go through the same environments and such however, all item positions have been changed and new enemies will appear at different points in the game.
On the higher difficulties new bosses were even added to make life tough for the player. The base stats of Ryu and the enemies never change but throwing in newer versions of the enemies with stronger attacks and new moves offset the need for stat tweaking. Every time I play a game with unlockable difficulties I wish that I was going to play something along the lines of Ninja Gaiden Black where you are in essence playing a new version of the game.
Another topic I would like to quickly point out is the question on altering difficulty levels in game. This is something that I'm all for with one caveat, for achievement based rewards (beat a level on hard, beat any level on hard without dying etc) dropping the level or raising it up will negate any kind of achievement.
Most often the use of this is if the player is hopelessly stuck at a section and the only way to get through is to lower the difficulty; playing a game for 20 hours only to get stuck at one spot requiring the difficulty to be lowered will kill the game for the player if they have to repeat the last 20 hours again on easy, especially if the wall is at an imbalanced final boss fight. There is no excuse for story based games like RPGs and such for them not to have this feature in my opinion.
One final point that I would like to make about this entry, my issue is with increasing the difficulty of the game haphazardly with simple tweaking. I'm perfectly fine with games that have easier settings for those that need help. There are far more creative options for making your game harder that doesn't involve making any damage a one hit kill.
I personally believe that games from the start should either be designed with the knowledge that there will be difficulty levels, or that there will be just one setting. Tacking on a few difficulty levels when you're all done is just a sign of laziness and trying to add another bullet point to the box in my opinion.
Balance is one of the hardest things to achieve in games and it seems like a lot of developers these days are so quick to throw it out the window instead of trying to preserve it. Even being able to adjust the difficulty on the fly doesn't cut it; if the game isn't balanced from the start then it's just a moot point. Give me an incredibly hard balanced title vs an easy imbalanced one any day of the week.