I would disagree. The average quality of games has certainly gone down but that's because there's so many of them out there all trying to do the same thing. The ones that stand out are certainly better than the standout ones of the past. I think nostalgia definitely makes us feel like some of the old games are better than they actually were.
I like x42bn6's point about games defining a certain period or a certain console. I'm interested to see what kind of examples you guys come up with for these. You certainly couldn't do this for modern generation consoles since they haven't been out for that long compared to how long they'll be out for.
My thoughts:
8-bit/NES: Duck Hunt, Super Mario Bros, Mike Tyson Punch Out
16-bit SNES/Genesis: Super Mario World Series, Donkey Kong Series, Mortal Kombat Series, Street Fighter Series, Chrono Trigger, Final Fantasy ports, Streets of Rage, Golden Axe, Sonic series
PlayStation/N64/Saturn era: Final Fantasy epics, Gran Turismo series, the rise of the sports genre, Zelda: Ocarina, Mario 64, Mario Kart 64, Super Smash Bros, Goldeneye, Resident Evil, Tomb Raider
PS2/Gamecube/Xbox/Dreamcast era: Halo, Final Fantasy X, GTA III and spinoffs, DDR, Guitar Hero
Modern Generation: Gears of War, GTA IV, Call of Duty 4, Wii Sports so far but maybe not when things are all done.
Handhelds: Tetris, Pokémon
PC: Doom, StarCraft, Counter-Strike, Sim City, World of Warcraft, Solitaire, Minesweeper