Is it so bad for the bad guy of the plot to be evil, power hungry, and/or greedy? Is it just too cliche to stand and too over done?

Bad guys who are just inherently evil, yes that just plain sucks. Bad guys whose motive for being evil is hunger for power or greed for money or possessions are kind of shallow, ideally they should have an underlying problem that they think (probably mistakenly) will be fixed by getting power/money/stuff.

To some extent it depends on your genre (comedy? drama? horror?) and the age of your target audience.

If you want to write drama for adults, then you would probably be better off with the type of villain who is a hero or anti-hero from his own point of view. Someone who gets into conflict with the hero mainly because his priorities are quite different. Maybe he is fiercely protective of a particular group of people that he feels loyal to, but either they don't deserve it or his protection of them comes at the expense of others who the hero cares about. Or maybe due to some injury or maltreatment he suffered in childhood the villain has an intense fear of something and goes overboard trying to destroy that thing or the people who can cause it, or build himself up to be totally protected from it - greed might be a type of this overcompensation. Or maybe he does everything in an attempt to impress a particular person he hero-worships or has a crush on, or an arch rival he is determined to be better than. If the hero is simply a sadist, he should at least have a unique goal of exactly what unhappiness he wants to inflict on whom.

Basically bad guys are people too, they have fears and desires, hopes and dreams, just like everyone else. Rather than being wrong in every possible way, a bad guy makes a stronger statement if he is only wrong in one detail, whether that detail is his priorities, his ethics, his methods, a personality trait, or one belief on which the rest of his goals and strategies are based.

A Good example of a bad guy is Saren from Mass Effect, that really believes that he is saving everyone by complying with the enemy instead of fighting against it.

I liked Mithos from Tales of Symphonia as a reasonably sophisticated villian. [spoilers] Basically, his sister's dying wish was to end discrimination between the half-elves and humans. He binds his sister to the Great Kharlan Tree to keep her spirit alive, while spending around 4,000 years selectively breeding the 'Mana Lineage' to make her a suitable avatar. Meanwhile, he's fashioned Martel (his sister) as a goddess, which most of the population worship. He does try to end discrimination, but presumably the power of the Eternal Sword and his sister's death sent him completely crazy, as he believes the only way to end discrimination is to make everyone the same race (half-elves) and kill everyone not of that race. In some ways, he's similar to Hitler.[/spoilers]

I think he's a pretty good example of a developed villian who works toward a noble aim in a sinister way - in fact, his goal is the same as the protaganists', just twisted a little. The way to develop interesting villians, as sunandshadow said, is to make the bad guys have goals, aspirations, etc.

Why make your villian kill people for no reason other than to cause chaos? He could be a terrorist, a political enemy, a politician who wants to use the fear provoked by attacks seemingly unconnected to him to gain a position of major power, even a particularly apathetic journalist who sees an opportunity to make a lot of money from the story. And that's off the top of my head. If your heroes are so varied in their philosophy, goals, and morals, why make all villians evil for the sake of evil itself? While we're on it, why make heroes good for the sake of good itself? Do you meet anyone purely 'good' or 'evil' who doesn't have a disease of some sort in real life? No? Then don't stereotype so much in games.

A pattern that is more common in fiction (and, alas, in real life) than in games is having realistic (not ridiculous) evil, power hungry, and/or greedy people and motives on our side, against someone who is merely forced into a confrontation and is not a "bad guy".

Action-RPG example: Joe Mercenary and his buddies are sent to a recently invaded oil-rich country to seize control of extraction facilities and defend them from non-terrorist insurgents, to the benefit of a cartel of oil multinationals.

Wargame example: within a larger medieval campaign, lay siege to a town full of peaceful heretics, kill them all, and steal what you can, in the name of God.

More subtly, the "good" side can demonstrate dramatic instances of cruelty, stupidity etc. and "good" characters can have serious personality flaws and behave badly on some occasion.

Quote: Original post by Speeder
A Good example of a bad guy is Saren from Mass Effect, that really believes that he is saving everyone by complying with the enemy instead of fighting against it.

Another great example on an even bigger scale is Halo. In Halo, the Prophets are basically trying to take this 'ultimate journey' which is basically the destruction of sentient life in the universe. Right there you have a whole group of people acting in a specific manner that forms them as the bad guys.

Personally, when I write, I like having a defined bad guy. Of course it's relative to what you're working on, but some stories are better with the reader going "Is he bad guy? Or wait, maybe it's him!" while other stories are better when the reader, within 5 seconds of meeting him can go "He's the bad guy."

Look at the old Star Wars movies, no one looks at Darth Vader and thinks 'Good guy.' On the other hand, there's Uncharted for the PS3. I don't want to give anything away, but there are a few run-ins with characters that could potentially end up being the final 'bad guy' and every few scenes you'll find yourself changing your mind based on what progresses in the story.

I think both styles work good given their role in the work.

Does the player actually ever gain anything from a lack of depth? Is there any reason NOT to blend the lines between good and evil?

Personally, I quite strongly disagree with blurring that line. The reason being that it goes against decades and decades and decades of storytelling. It seems almost unatural, like something important is missing.

I think of it as a scale, with about 15 points, evil and good share these, but naturally, they can never be equal. Someone might be more evil than someone else, someone almost on the cusp, but everyone is still either good at heart, or evil, and can be thought of as such.

In my opinion, nothing is cliche, or perhaps I should say "badly cliche", if you can add depth to it. On some level, almost anything is cliche. "Uncertain commoner is thrust into adventure and saves the world" sums up many stories (Lord of the Rings and Harry Potter are but obvious ones), but does that doesn't make those stories bad or even particularly similar? Not in my book, since they are only the same at the most abstract and superficial level. The real story lies within that "cliche". Let the bad guy be evil, power hungry, and greedy. Just don't let him only be that. Make him more, and it doesn't matter if other villains are evil, power hungry, and greedy.

That's my opinion, at least. A good cliche is fine by me; it gives me something to start with, a framework that the story then fleshes out, and by the time it's done, the building looks nothing like the scaffolding from which it was raised.

But as it was pointed out: good and evil are often a matter of perception.

I loved the Half-Life 1 marines because they were there to do THEIR JOB, and that included killing me. They began hating my guts later on, because I was killing their friends. They always had a good motive to fight me and that made them believable.

They were 'bad' to me, as I was to them.