My two cents...
Why not be both? Certain NPC's are employees masquerading as AI.
I suggest this because it seems highly unlikely to me that there would be a large group (dozens or even hundreds?) of game technicians who would be absolutely 100% cool with trapping all these players in a death game and then walk around like as peasants and shop keepers.

Also, AI dont have to log off to eat or sleep or live their life so it would make more sense why we can interact with certain NPC's all through the day, week, year, ect.

EDIT: plus, game this advanced would likely have AI smart enough to mimic real people very very well.

I'm not the GM, however, so I leave the decision up to you!