I don't think it's that black and white. There are real people behind the characters with real emotions, and people have spent real money on this game. Any action that oppresses a player such as KS-stalking and preventing them from playing the game is morally wrong, virtual or not, as it is not in the spirit of game-competition.In a game, the value of a virtual character's life is essentially meaningless. You have infinite free respawns, and your character isn't permanently hurt in any way whatsoever. Only your pride is injured. This means that the real life equivalent of in-game arena retaliation is lightly slapping someone on the face, which I think is totally justified for very minor crimes.
This is why I believe that in-game retaliation is always morally ok to do.
The Arena on the other hand is a different animal. It is a player's choice to go there, so to feel the need to retaliate against someone else's actions in there because they got "mugged" is ridiculous.