This is a Sega Mega-Play cabinet.
It could play many different kinds of games, unlike most other arcade machines at the time. On the little TV at the top, you could pick which game you wanted after you put in your quarter/yen or whatever coin. The game would then be played on the bottom screen. This particular one has Sonic 1 on it, but some machines also had Sonic 2 available.
The games (Sonic 1/2) are exactly like on the console systems, only you get to play them with arcade sticks and buttons. It may seem a little redundant to have a console game in an arcade...but really, this is a good way to try a game before you buy it or rent it. Who wouldn't spend a quarter to figure out if they liked Sonic?