This is another one I used to play with my friends in HS. I haven't tried it with some of the newer games, but the Budokai games were perfect for this. Budokai 3 was the last one we ever played with. Here are the rules:

Rule 1: Standard fighting game rule - if you lose, you take a shot.

Rule 2: If you're playing with some kind of uber-powerful god-character and you unleash an attack so powerful that it reduces the arena to a smoking crater, the entire room takes a shot, including spectators.

Rule 3: If you select Vegeta, you must win. Vegeta NEVER loses. To anyone. No exceptions. If you fail to win a battle using Vegeta, you take a double shot and wear the box of shame. The box of shame is the first available empty beer case, appropriatly branded with the word SHAME in big letters on all sides. It's worn on the head like a helmet, concealing the face, with a hole cut out for the wearer to see through.

Rule 4: If you select the Great Saiyaman, you immediately take a shot before the battle even begins. The Great Saiyaman is the gayest thing in the history of mankind.

Rule 5: If, while playing as the Great Saiyaman, you do that stupid fuckin pose, you take a shot. Every time.

Rule 6: If you win a match using the Great Saiyaman, you take a shot anyway for having the nerve to let him win against anyone. However, you are not spared from taking a shot if you lose, and your opponent takes a double shot if you beat them (see Rule 7) so most people ignore this rule.

Rule 7: If you allow yourself to lose to the Great Saiyaman, you take a double shot. Even the Saibamen should have no trouble with that flaming fairy.

Rule 8: If you lose to the Great Saiyaman while playing as Vegeta, you take a TRIPLE shot, wear the box of shame, are banned from the game for the rest of the night and are declared beer-bitch, fetching cold brewskies for anyone who runs out until a new beer bitch is named.

Rule 9: If you defeat Vegeta using the Great Saiyaman, you take a double shot, are banned from the game, and receive one open-handed slap on your bare back from everyone in the room, as hard as they can.

Rule 10: General rule - if an uber-powerful character other than Vegeta, i.e. Brolli, is defeated by an uber-weakling other than the Great Saiyaman, i.e. Krillin, appropriate rewards and/or punishments will be determined by the spectators depending on the situation.

More rules can be made on the spot, of course. Also, we have similar rules for many different games, but this one was by far the most fun to play.