The arcade video games industry has discovered a game far more destructive than Space Invaders and more voracious than Pac-Man: it's called Supply & Demand.

Economic realities are hitting the industry hard. Where operators could once expect the average arcade game to yield roughly $100 a week in revenues, today "the average draw per game is probably $50," asserts Charles Farmer, president of domestic distribution for Bally Mfg., the nation's largest games manufacturer. "This is no longer a get-rich-quick business," said Farmer, interviewed at the annual convention of the Amusement and Music Operators Association last week.

But it's not the fault of the recession. And it's not that the public has tired of arcade games. In fact, reports Play Meter, the authoritative trade journal of the arcade industry, Americans will spend $600 million more in quarters on arcade games this year than they did last year. By the end of 1982, arcade games are expected to have grossed nearly $7 billion.

The real problem is over supply. "The arcade market," says Farmer, "is saturated. We've gone from being a sellers' market to a buyers' market in one year." The numbers, says David Pierson, Play Meter's editor, bear that out. In 1981 games manufacturers shipped 470,000 machines. This year, the number is closer to 560,000. The result is what might be called "The Great Games Glut."

The glut means that arcade games can now be found virtually everywhere: building lobbies, laundromats, hotels and restaurants. In fact, says Donald Osborne, Atari's vice president of sales and marketing for arcade games, fully 80 percent of the arcade machines are in "street business" rather than in actual arcades.

The result, says Phil Eisenberg, a games operator in Johnstown, Pa., "is that if you figure each block has $100 to spend on games, there are now 20 machines per block instead of two."

That means a drastic drop in revenue per machine. Moreover, the arcade business is a 'hits' business, like music, and machines that lose their popularity have to be replaced. That's expensive, says Eisenberg -- and between increasing costs and decreasing revenues, "I'm purchasing only 20 percent of the number of machines I bought last year."

The glut and the corresponding selectivity by buyers puts the squeeze on the smaller arcade games manufacturers. "The shake out is already happening now," says Atari's Osborne, "you could end up with noteworthy companies in very poor financial shape."

Play Meter's Pierson is blunter: "We're going to see a lot of manufacturers and arcade operators go out of business."

But Farmer of Bally sees all this turmoil as a sign of the industry's maturing. "We're getting rid of the inefficiencies," he contends.

As the industry matures, it is also marketing itself differently. Sega, the arcade games subsidiary of Paramount Pictures, promoted its Zaxxon arcade game with a TV advertising campaign this past summer. Bally and Atari are expected to follow suit with their games shortly.

Demographics are also becoming more important to the industry's positioning efforts. One of the major reasons for Pac-Man's success was that women liked it and played it. As a result, says Farmer, Bally has now hired female video games designers.

Of course, it's still the technological innovations that drive the arcade business. In Chicago, Sega introduced a game that integrates computer graphics with dramatic backgrounds projected through laser video disc technology to simulate a Star Wars-like dogfight in space. The Alstate Group of Nevada offered a two-in-one game that lets players play against each other through the machine while communicating via an intercom -- or by themselves if they prefer computer to human competition. Several companies featured enhanced three-dimensional color computer graphics in their games offerings.

"You'll be seeing more new technologies in arcade games in the first half of next year," predicts Atari's Osborne.