Professional Wrestling games can get this way too. Get a no-DQ match in, the ultimately-buffed character, some poor jobber, and inflict pain in a very customizable manner. Especially if you lost the prior match to disqualification, too — remember no-DQ? Remember how the referees of late actually appear in the ring?
Particularly hilarious is to change movesets around and manage to humiliate everyone involved. Did Triple H really just skip to the ring like Mickie James and do the splits like Melina when he got there? Did he grab John Cena and spank him in the middle of the ring to open the match? Was Cena's response to stand up and work his hips lewdly at Triple H in a taunt? Yes. Yes they did. And it was awesome.
The "Fulfil Your Fantasy" match from Smackdown vs Raw 2006 allows you to spank your opponent on the ass, and it actually helps you win. If you win this way, you're treated to a victory sequence of the unfortunate Diva getting hit on the ass with a paddle. You can also go to town on them with pillows and rip their clothes off.
Other kinds of fun you can have include: hitting your tag team partner (tag), hitting the referee (no DQ), making your opponent repeatedly run back and forth in the ring until their stamina runs out, etc.
A variation to the pro wrestling example can be found in the UFC 2009: Undisputed video game — since the match can go to a decision, and the crowd doesn't get a vote, why not drag out a horribly unbalanced match-up? Example, fifteen or twenty-five minutes of Lyoto Machida leg kicking James Irvin, with Machida (at least in the release version) having low enough Strength that he's unlikely to knock Irvin out, or as long as your striking defense is up to par, sticking Demian Maia against any middleweight with middling or lesser grappling.
With 2010's enhanced graphical effects, it's possible to repeatedly strike the opponent in the body, creating humongous red welts on their torso. Enough body shots will stun and knock down the opponent, but will not KO unless they're too close to the edge of the cage. It can eventually reach a point where every body hit will cause a knockdown, all while Rogan and Goldberg remark that hits like that are probably breaking ribs. Yes, that's right — you can deliberately prolong the match just to see how many bones you can fracture!
The Soul Series allows you to continue whaling on a character after KO'ing him or her. Made even more cruel by the KO'd character letting out a death scream for every hit after his or her death. In fact, in III's Legend mode and IV's Arcade mode, you get an "Overkill" bonus for doing this as much as possible.
You can extend the cruelty by using throws and attack grabs, since the replay will not kick in (stopping the overkill) until the throw animation has ended. Certain characters get to extend the punishment to almost 10 seconds by chaining throws one after the other, Ivy with her sword-impaling attacks and Astaroth or Rock with their variety of grabs, including catching in midair or lifting you off the floor, could probably take away a second life bar after they KO'd you.
Lastly, you can combine after-death combos with kicking your opponents into the abyss if it's available. Cruelty potential maximized.
Any fighting game with fatalities could fall into this trope, but special mention has to be made for Samurai Shodown V Special. In all the games in the series, it is possible to "accidentally" kill an enemy by using the right attack on the right part of their sprite as a finisher, usually cutting them cleanly in half. Samurai Shodown IV introduced actual fatalities, which were messier. In most games in the series, Nakoruru (the Nature-Loving Girl) and Rimururu (her younger sister) were immune to any death effects. In V Special, however, not only was it easier to kill an opponent, but these two characters were no longer death-exempt. There is something disturbing about chopping the twelve-year-old in half◊ or making her cute sister explode in a shower of blood and body parts◊.
In the Mortal Kombat series, after you have beaten your opponent, the game prompts you to "Finish Him!" Each character has a special coup de grace attack you can use to deliver a brutal and completely gratuitous death blow. In most of the games, there's no real reward for this (most games have no scoring systems, and in games like Mortal Kombat: Deadly Alliance, a Fatality does not earn you more Coins), but it is interesting.
Taven's quest in the Konquest mode (which is basically another game within the game) in Mortal Kombat: Armageddon really adds a new dimension to just how cruel the Mortal Kombat universe can be. It's no surprise that Taven can murder defeated enemies in the game with his bare hands (in four different ways!) and with various weapons he picks up, but to unlock a treasure, Taven must kill an opponent after he's already surrendered, been rendered helpless, and has even given him help on his mission, immediately after Taven promises to spare his life in a cutscene. Worse, there's one point where you can not only beat up some monks who have done nothing to you, but you're rewarded for doing so. That Taven is explicitly set up as the noble hero of the game makes things more screwed up or hilarious.
Mortal Kombat 2 was the first game to add the "babality" option which allows you to turn the opponent into a baby version of themselves rather than killing them. It was also the game in which it was discovered that a bug could allow you to continue attacking the baby after doing this. In the most extreme example, Baraka could perform a bability and then use his Blade Fury move to turn the baby into a fine red mist, which would also crash the entire game.
Rumble Roses has "Humiliation" techniques characters can use if just beating their opponent into submission isn't cruel enough. The game can also be set to only allow humiliation victories, and various game modes encourage or even require it. Also, no character is ever knocked unconscious; beating on them just makes it harder for them to escape pins/humiliation/etc, so if you have the upper hand in a match, you can pretty much pound your opponent mercilessly until you get sick of it and decide to pin her to put her out of her misery.
While you can't actually hurt the downed opponents, you're still free to perform moves, taunt, and teabag the opponent in Marvel vs. Capcom 3, if you wish. Don't expect any respect for doing it if your opponent is a human, however.
Azrael has this as one of his main draws. Nobody else on the roster breaks his/her opponent's bones with their Drive attack. He can kick his opponent across the screen and continue to whale on the poor sap while they're still stuck to the wall. Playing him is all about literally destroying the enemy with overwhelming strength.
The most cruel thing you can do in the later entries of the Super Smash Bros. series' is Home Run Contest. In the minigame, you build up as much damage as possible on a living punching bag named Sandbag within 10 seconds, and then attempt to knock it away as far as possible with a Home Run Bat. Sandbag also appears as an item in normal modes that you can beat on to spawn even more items. As certain characters, you can even stuff it down your throat and swallow it to heal some damage. It's definitely not easy being a Sandbag... though the Trophy descriptions claim that Sandbag actually enjoys being whaled on by others.
From the third game onwards, you can use the Stage Builder to design completely enclosed spaces. With a little creativity with damaging surfaces, you can force the game to spawn characters inside an enclosed space from which there is no escape. Because KOs in Super Smash Bros. can only be scored by Ring Out (except in a certain game mode) and characters who have taken more damage sustain greater knockback, this inevitably results in characters bouncing around like pinballs.