Before the crash began, there was a large amount of video game consoles available to the public and consoles such as the Atari 2600, the Atari 5600, the ColecoVision, and the Magnavox Odyssey among others, were struggling to dominate the market. With so many video game consoles available and each with their own set of game libraries, the video game market was heavily saturated and games were advertised just about every where. The public had a hard time keeping up with so many new releases and many new video games released were below standards and not very good...game play wise and quality wise. Many people lost trust in video game companies and were put off by the release of so many horrible video games.
Around the time that the video game market became saturated, new personal computer systems heavily marketed towards gaming such as the Commodore 64 and VIC-20 were starting to come out that offered a very inexpensive alternative to video game consoles during the weak economy at the time. Usually these personal computers also had more advanced games released for them as they had more memory and offered better graphics and sound than video game consoles.
Atari had a big role in the video game crash as they caused two notorious disasters that would drive a stake deeper into the market's coffin. In December of 1982, Atari released a highly advertised game called E.T. the Extra-Terrestrial based upon the popular movie of the same name. Atari had very high expectations for the game and assumed it would sell millions so they manufactured a ton of copies and cut development time for the game short so they could rush it out to the market in time for the holiday season. E.T. the Extra-Terrestrial ended up being considered one of the worst video games of all time and sales were abysmal. Atari was caught dumping a huge numbers of the game into a New Mexico landfill refusing to tell reporters it was because of the lack of sales for the game and instead told them they did it because they were switching over development towards their new console, the Atari 5200. Atari also released a version of Pac Man that was rushed out as well and over estimated the sales they would receive causing another catastrophic financial failure.
Near the beginning of 1983 many companies left the video game industry altogether including Coleco and Mattel with Imagic later going under completely. Small time video game developers for Atari also closed down. A large number of video games went unsold and retailers had an over abundance of games they couldn't get rid of. The video game market did not start recover until the release of The Nintendo Entertainment system in 1985 and even then, Atari who once held the crown with the Atari 2600, would end up never fully recovering their initial popularity like many other video game companies before the video game crash of 1983.