Crazy
You cant just say what happens perhaps on your own equipment is how it will be for everyone. Different amplifers will have different options.
Fair enough. It is my understanding from my days at avs that most receivers handle small/large this way. Of course there are exceptions plus other settings on your receiver may also change that.
Im not so certain that the PS3 changes the "compression" for the room settings as that would give someone an inferior coded sound effects. If that was the case surely then they may as well use the best setting their hardware can use and just turn their volume up/down accordingly. Assuming what your saying is like a Blu Ray moving switching between sound modes.
Large Theatre = Uncompressed PCM / Living room = DTS /Small Room = Dolby Digital
Also from memory my amplifer showed no signs of detecting a different bitrate when changing room settings in the game. If anything I really think its just s small audio boost or audio dampening they put in the settings and nothing that technical. I await to see if any other BK users find the "SMALL" room setting has a slight benifit in bass response rather than the largest setting giving that as we would assume it should.
If they do then thats a bit weird....
It does change compression but you are thinking of the wrong compression. You are thinking of compression in terms of MP3/WMA/OGG/WAV/Dolby/PCM/etc but that is
data compression because you are compressing the file (similar to zipping or raring it). The in game settings change
dynamic range compression. Things like bitrate don't affect dynamic range compression.
Here a quote from
http://en.wikipedia.org/wiki/Dynamic_range_compression which sums it up:
Wikipedia Dynamic Range Compression Article
Dynamic range compression, also called DRC (often seen in DVD and car CD player settings) or simply compression, is a process that reduces the dynamic range of an audio signal, that is, narrows the difference between high and low audio levels or volumes.
So range compression changes the difference in volume between quiet and loud sounds. That means that if you have lower end speakers (or TV speakers) then using large theater will mean you will have crappy sound. Either you keep the volume low so the loud sounds come out well but you can't hear the quiet sounds, or you keep the volume high and you can hear the quiet sounds but the loud sounds are too much for your speaker and come out muddy.
To summarize:
- - Data Compression = MP3/WMA/OGG/FLAC/Dolby/ZIP/RAR anything that is used to make the file size smaller, lossy or lossless
- - Dynamic Range Compression (the setting in the game) = The volume difference between loud sounds and quiet sounds.
- - - Living Room = Most compression, the volume difference between loud and quiet sounds is minimal = Use this on TV speakers
- - - Small Theater = Middle compression, the volume difference between loud and quiet sounds is in the middle (don't really know another word for it

) = Use this on lower quality standalone speakers (home theater in a box, cheaper satellite speakers, etc)
- - - Large Theater = Least compression, the volume difference between loud and quiet sounds is the largest = Use this on decent or better standalone speakers (bookshelf speakers, tower speakers, etc)
Of course just because large theater is technically the best to use if your setup can handle it (volume differences are more realistic and more along the lines of what PD wants you to hear) doesn't mean it will sound the best to your ears or with your buttkicker so stick with whatever works best in your setups.
Do you have night-mode on any of your audio devices? MP3 player, speakers, receiver, etc? If you do then try it out, that is basically what compression is. It allows you to hear quieter sounds while still keeping the volume low enough that the loud sounds don't wake your parents/gf/wife/roommate.
And I know this may seem off-topic but I think it's relevant to buttkickers as it is technically an audio device, and understanding differences in the way audio devices/settings work could help setup. If anyone wants me to stop because you feel it is off-topic just ask and I will stop.