The market is a little saturated,from when it first started...all depends on tons of traffic,and if you do have adsense on them i would probably choose the "image" only add option.
I have 2 arcade sites and never had any problems. Yes the earning is very low and there are many arcades online nowadays.
Yes arcade sites are not getting paid very good per clicks, but its a lot easyer to get a arcade site up to 3-4K per day.
Arcade sites are allowed, but you are not allowed to place ads directly above, below or next to the flash games. You are also not allowed to place ads directly next to the images on your arcade. You must have a visible border between them. People still do this stuff and can easily be banned for it. I was told it is not allowed because it could easily confuse site visitors and result in accidental clicks which in turn ends up giving advertisers poor results on their ads. Arcades make very little money, but if you like them go for it. But as the saying goes....don't put all your eggs in one basket!
gamin niche is low paid but adsense TOS doesn't has anything with this. you won't be banned, but your earnings will be really low. if your site gets a lot of visitors each day, i suggest selling links. you'll earn more than from adsense.