Why don't the girls in arcade games take their panties off too?

It is likely for the same reason that certain parts of the body are mosaiced or censored in some way in other adult games, anime, or manga: an interpretation of Article 175 of the Criminal Code of Japan. Since arcade games are seen in more public places than console or computer games, the game's producers may have decided to play it safe and only show the torso area. The extent of the law is still in debate to this day, however, hence the reason there are so many interpretations of it and therefore so many degrees of censorship.