I agree, but I disagree with your last point. The "right" way is to design armour that fits in with the aesthetics of the game world. Many fantasy games exist within a European world - therefore it's reasonable that the armour would also fit the European style. If a game was set in a world inspired by, say, Africa, then you would expect to see various African influences in the clothing and armour styles.
Which style is considered to fit in with the aesthetics of the game world will vary from player to player, however. That's why I wrote there is no "right" way to design armour. There will always be people who think a given style fits and others who think it doesn't. Combining influences from different parts of the real world can also lead to a mixture that is both interesting and convincing, though the chances to fail might be higher than when you take your inspirations from just one region.
If armour isn't all that important then it wouldn't exist on the scale it does in video games. You wouldn't have most of the characters wearing it, because it's largely obsolete. But even then, if it is just to cover more sensitive spots - why an armour bikini? It doesn't make sense. Why would a character walk out just in that? Would they not wear the protection underneath their clothing (like how male sports players wear cups)? That makes more sense.
Bikini armour isn't "entirely irrational", perhaps. But I personally believe that only a minority would - or should, even - be wearing it. A particularly self-confident or flirtatious leader, perhaps. She could wear it to enhance the sexual characteristics of her body and so on - it's a similar tactic to the explanation of Red Sonja's chainmail in Peter V. Brett's Red Sonja: Blue. But that doesn't work for every character.
I agree. It would be silly to have all or most women in a game wear armour bikinis. "Would be" because I don't know any game in which this is the case.
In sports, both men and women wear protective cups underneath their clothes, but they don't face the risk of their clothes being cut with swords. If you want to protect a certain part of your body
and your clothes, you'll probably wear clothes underneath your armour. I think it's also more comfortable to wear clothes underneath metal armour, not vice versa.
Considering how close we are to the characters - even in games with cameras like NWN or Original Sin, it doesn't make a difference. Why do you need to know the gender/sex of the other characters anyway? And it's often very easy to tell the differences if the animations and models are constructed correctly. In Skyrim, for example, gender differences in armour are minimal for the most part (though there are feminised armours, and even a boob armour piece - Steel, I think) and you can still tell the difference should you need to.
It's not always necessary to know an NPC's gender, or race, or anything else about him/her, but those informations might allow some more educated guesses concerning the NPC's possible motivations. And if you're looking for a male deserter, for example, you might not need to talk to armoured women at all (as long as you can tell them apart from armoured men).
Just because something is demanded, it doesn't mean it should be implemented. Just because something isn't demanded, it doesn't mean it shouldn't be implemented. It isn't about "demand", it's about getting rid of these stupid, unfair, imbalanced, contradictory and even sexist (again, not saying Larian are sexist) differences in design and implementation.
You're right, not everything players want can and should be implemented. But if a company wants to stay in business, it can be dangerous to ignore demand.
Maybe you should make it a little clearer what exactly you consider "stupid, unfair, imbalanced, contradictory and even
sexist". I can agree that these adjectives would properly describe a game in which all women wore bikini armour while all men wore full armour, though I don't know such a game. If the only difference is that women's armours have boob cups, however, it's on the same level of non-functionality and "stupidity" as giant spiked shoulder pieces.
Imagining the opposite situation, I can say I'd call a game in which all men wore loincloth armour while all women wore full armour "sexist". I'd find it strange if men's armours just tended to be more revealing than women's armours, and yes, it would probably not be very convincing unless the developers provided a good reason, but "unfair" or "sexist"?
Okay, you go into any women's clothing store and tell me it's easy to buy a wide range of clothes that don't reveal, whether it's by their tightness or by being cut to show cleavage. It isn't a choice, trust me.
Maybe your experiences are different, but when I go shopping with my partner, it's not terribly difficult to find clothes for her which are neither tight nor cut to show cleavage.
Dev studios should bother because women are almost half of the gaming community. Women are fighting tooth-and-nail to be taken seriously as gamers in the face of sexism from development studios (intentional or otherwise) and some extreme sexism from the gaming communities themselves. They should bother because this is the year 2012, and we should have left many of these ideas behind.
Don't you think you overgeneralize? You sound as if almost all games were sexist and women were almost completely ignored by the games industry. As far as I can tell, that's simply not the case. So which ideas should we have left behind?
I also don't see your point. I think Divinity 2 was much better than many other RPG's when it came to gender fairness, and Rhode is a good example. She's basically the most powerful person in the Dragon Slayers, she starts out as the player's boss, and is well respected. She takes down Talana.
In my opinion,

isn't such a great example. Rhode may be a strong woman, but the most powerful people in the game are Zandalor, the Divine One, Damian, Bellegar, Behrlihn. All of them men. Moreover, there is a greater variation in the appearance of male characters. To put it bluntly, almost all of the women looked the same to me - big-breasted Barbie dolls with model-like facial features, just with different hairstyles, eye colours and clothes. I would have preferred greater variation: more stout women, more old women, more plain-looking women. Though I see that extending the range of character models is a significant cost factor.