Dissidia's second game mode was actually added specifically for the international release. Arcade mode converts Dissidia into a typical fighting game. All of the game's RPG elements — levels, equipment, learned abilities — are removed, leaving each character in its base form in order to balance the playing field.
Additionally, all the characters are unlocked from the start in arcade mode, which means players can jump right in with their favorites. This includes the villains, so if you're eager to kick some butt with Sephiroth or Golbez, there won't be any problem.
Like a typical arcade fighting game, arcade mode throws you into a gauntlet of five enemies. Unlike an arcade game, however, you can retry any battle you lose. Don't worry, your quarters are safe, and it's not recommended you attempt to insert any into your PSP anyway. You'll also be rewarded with items you can use in story mode.
Arcade mode characters are also available when battling friends, so if you've just picked up the game and your friend has a level 100 character with all the best equipment, you can still fight on level ground.