Arcade games are, in their majority, available online and are smaller compared to those on sale at the store. But there are some publishers that sell discs with arcade games in it (for example: PopCap, Sega..).
They are games which you can purchase over Xbox Live using Microsoft points. Whether or not you have a Gold or Silver membership, you can still purchase them. Essentially, they are games which are smaller than their disc-based equivalents. They tend to be
games you would see on a flash-game website over the internet (some originated from the net, like N+ and Fancy Pants Adventure).
They come with a maximum of 200 available Gamerscore (excluding DLC), take less memory, and generally shorter, and offer some really unique experiences from AAA titles you can buy on disc like Call of Duty. If you are looking to purchase one, may I recommend
Castle Crashers, Scrap Metal and N+.
Yes! I agree with Big Red Husker! Pinball FX2 is a very good, well made, quality Xbox Live Arcade game. Well worth what ever you feel inclined to pay. That is, pay for all or only some of the tables that FX2 has available in the arcade.