If you're having MIDI issues, it's more likely to be your own computer having an issue reading the files. However, there are numerous solutions out there if I recall right. Just Google "computer won't play midi files" or something similar, and see what you can find. If you still have problems, I'll see what I can do to help.
As for MIDI vs. MP3... it's pretty obvious. MP3 has much more quality, but at the cost of being a much larger file. Just open up your audio folder and check the size of a MP3 compared to the MIDI file. This isn't to say that it's a bad thing to have an MP3 in your game, but if the final product of the game turns out to be something humongous because of just the songs, few people will want to spend that much time downloading it.