Instructions
Start a level, either online or offline, with more than one player.
Press the "Home" button on controller of the player you want to drop out. Select the option to "Turn Off Controller" and, after about 10 seconds, the player should drop out. For levels in online mode, there is an alternative method.
Pause the game with Player One's controller, then navigate down to "Manage Players." Select a player's username, then select the "Drop Out" option.