we don't actually know what the contract specified regarding payments as we do not have the contract

It definitely would specify as a condition that they pay the developer X amount of money per sale of their game. 100%, if they didn't id be incredibly surprised. Actually id say to the game dev in that situation to take action against their own lawyer because they should be disbarred if it wasn't a condition of that contract.

we don't actually know if they needed authorization for such promotional activities as we do not have the contract

Usually in this type of contract (I studied this in contract law) they would give approval for the dev themselves for price cuts or discounts. Its about control over their sales. The publisher handles getting the game out there and marketing and all that for their cut but the flipside is the dev has control over pricing, DLC strategy..etc. Its a negotiation but in general the dev has control over that unless the publisher is a parent company.

no they may have lost out on revenue

Well in this case what it would be is their cut for a potential sale lost due to this sale. So if the sale has 20k units moved, they will be due the full price of the game so if its $10 they will get their cut of the $10 so if that is 50% then $5*20k. Not 50% of the $1 price that was being sold at. So their lost revenue is the cut from the original price not the cut from the $1. I should have been a little clearer about that but that is what I meant.

maybe the publisher did breach their contract.

Well if it is like the dev says then they did.

Maybe the developer misunderstood the terms.

The only way I could see that is if the publisher pays out at a specific interval but it seems like since the dev was already in contact with their lawyers the publisher was up to funny business and tried to make a quick buck. Either way its a fun story.