I think the approach Microsoft have taken in the past in China, if I remember correctly by offering to exchange an illegal copy of Windows for a cheaply licensed one if not free is the sort of strategy that the industry needs to look at. However the games and software market are a bit different so we can't treat this solution as universal - operating systems cost a lot more money to develop than a game, despite their rocketing costs.
The Ultimate Steal promotion that Microsoft run for students to buy Office 2007 Ultimate for a reasonable price ~£40 is the way forwards, this enables one to actually think about the value they're getting instead of merely dismissing it as out of their price range. The normal version retails closer to £700.
Likewise this last weekend gone by Valve have continued their great promotional pricing with the Orange Box at just under £6 on Steam - you cannot fail to pick that up. Valve are one of these companies however that add tremendous value to their games and the multiplayer element generally precludes pirates from being able to enjoy the experience as well. I remember about 6 months ago they also did a deal for the original Half Life on Steam for $1, I snapped that up too even though I've already got a legitimately bought copy of Half Life, albeit not on Steam.
I think when faced with tremendous piracy that you're not going to get rid of you might as well attempt to reasonably convert those into actual sales.
I do pirate a lot of things, but I also own many more things. I find that I will never generally buy a game on release for £30 - it just doesn't make sense when it's going to go down to the >= £15 mark a few months later. Games that are less than £10 I will consider buying as an impulse purchase.
In short, the games market sadly need to look at their pricing. If we look at efforts like Wii Ware this is where we're going. Simpler more focussed games that cost less to produce and accordingly cheaper prices.
