there's a lot to discuss in terms of how fighting game AI should work to provide a fair challenge, but a safe answer is "Not how MK2 Arcade does it"

MK2, as it turns out, has an invisible difficulty variable that increases as you go through the game

and what it controls is

the RNG probability that the AI will read and counter your move on the same frame that you input it

capping at 90%

So in effect

You’re basically controlling both characters