That crash was caused by arcades popping up everywhere. Laser titles like dragons lair and space ace were full on animated video while the 2600 had 20 yellow pixels for Indiana Jones. You had two button running on track and field, flight sticks on tron and zaxxon, sit down cabs with steering wheels or the yoke in the star wars cab competing with the iconic but boring 2600 stick.
Wasn’t the market being flooded, it was nobody having any cash for a 2600 cartridge because we put it all in the arcade cabs ;)