I've always wondered how games did this -- auto-configure your video settings.
For example, with my R9600, LOTR: Battle for Middle Earth set my graphics to High, and resolution to 1024x768.
Do the programmers make a list of video cards, test them on their game and take note of the optimal settings per video card, or does the video card itself have a way of sending information to the game like, "hey, I'm a dumb video card. Lower the settings."
I suspect it runs some type of benchmark or time demo sort of thing. In other cases settings can be determined by the hardware. In Doom 3, for example, 128 MB video cards will always yield medium texture quality. This is even if your system is capable of running more.
The important thing to remember is not to always trust the settings autodetect choose. So play with the settings yourself.