However, having spent enough time in the software industry in multiple roles, releasing a product/game with level 1/2 bugs where the usability is seriously broken is not ethical.
I've seen enough cricket games being released with level 1/2 bugs. Things that could be found out within 10 mins of playing the game. The product/business management in those cases went ahead with the release knowing that these things are broken. Which in my opinion is not ethical though not illegal.
I'm sure Chief here, who is a part of product management, can agree with some of this.
Generally the definitions used would be something like: P(riority)1 "Unshippable". P2 "Serious", P3 "Annoying" and P4 "Suggestion".
It's INCREDIBLY rare for a game to feature a P1 bug. Especially with console games that go through rigorous testing with the platform holders. I wouldn't say that it was "illegal" (it may well have been missed by all concerned) but I'd certainly say it was grounds for recall/refund etc.
P2's are the ones that I think we're talking more about here. Again, very rare that any of these would be allowed to slip through. These are definitely ethically out.
P3's are generally classified as such because they *can* occur, but very rarely. It's your P3 bugs that impact quality rather than functionality (usually dependent on how many there are!).
P4 bugs are generally suggestions for improvements rather than actual errors per say.
What you say about developers, we entering an era where an awful lot of them are self-publishing their games, so increasingly all the traditional publishing functions ARE being handled by developers. Some of the time that works great, and others not so well: They are quite different skill sets.
Generally speaking the developer wants to make a great game. But usually they need funding and that's finite. The investor (not always a publisher) wants to make money back BUT they know that to do that they need a good game. On most of the projects I work on, my role is usually to sit in between the two parties and make sure that the balance between them is maintained. I listen to everyone's interests and mediate the best solutions.
Ultimately YES, usually whoever is paying to make the game makes that final call on when they release it. But hey: bear in mind that a fairly normal upfront cost is, say, 45% software development, but another 45% to actually manufacture all the discs etc, and 15% to market it... So you're spending a HUGE amount of money just to get it out there: it makes VERY little sense to manufacture something broken.
IMO no-one knowingly releases a defective game - A publisher doesn't want that stain on their resume just as much as a developer doesn't: there's no real "cut and run" in a moderated environment like console, steam, apps store etc.
But bugs sometimes can be missed - there's then a serious consideration of A) How detrimental to the game is it? B) How often does it happen? C) How much will it cost to fix it? D) Does A+B+C make it worthwhile? And yes, I *have* seen situations where the conclusion of D) is "No". And no: I won't list them, out of professional etiquette.
Not sure that actually addressed your points, but some FYI stuff if not!