Mario, specifically in the Super Smash Bros. games (you are in the game)?
So it's finally come, the battle of the ages,
My heart beats as a drum, we fight across these stages.
Super Smash Bros. is a free-for-all fighting game which occurs on a number of different battlefields/arenas from around the Nintendo Universe.
A friend becomes an opponent, my foe becomes my ally,
Swiftly, each blow a component, fire in hand, I shout banzai.
Sometimes there are team battles (ie. 2v2s). Players can choose any character they want, which means that two opponents could pick Mario and Luigi (friend becoming opponent) or two partners could pick Mario and Bowser (foe becoming ally, plus Bowser is a TANK). Each attack is a button press, and Mario's powerup is hands of fire (after he eats the fire flower). Banzai is a Japanese phrase, like the creators of Mario.
Haggard, I fight again and again, the puppet of an unseen force,
For victory I strive to obtain, so I can fight and beat the source.
The players are the unseen force, controlling Mario in the game; they're trying to win.
I'm a hero across all lands, everyone knows my name,
Grim, I'll fight you with my bare hands, I am king of this game.
Everybody knows who Mario is; he's the face (king?) of Nintendo games, for the most part. He also doesn't have weapons (unlike many other characters in the game) so he fights with his hands.
Here, my brother who'll help me fight, he'll freeze you with his cold dead stare,
Together, fight against our might, when you meet us, you'll say your prayers.
It's-a me, Luigi! And his famous death stare
The first letters of each line spell SMASH FIGHT, which is how I figured out the "where am I" part.
Also, the title
Seems to imply a game where beloved characters are "forced" by their players to beat the stuffing out of each other to the amusement of the players. As much as Mario is an interesting character to play, there's nothing quite like a Kirby wombo combo win :)