If you play games, and change the resolution from 720p to 1080p the performance lost will be very big, so most of playstation games are balanced to work at 720p, doing so if the users wants to go for 1080p there will be no hardware avaible to play that, or they would have to drop graphics even more what sometimes is not possible, so yes they just upscale the image.
you can see that a lot of games says on the box that runs at 1080p, but it is really 1080i that is interpolated, it is not true 1080p.
if you search on the web you can find lists of true 1080p games some of them like grand turismo are 1080p only on garage (lol) and in gaming it is upscaled.