A very interesting idea matty.
For a competition with a big prize, a gladiatorial arena works well, obvious things to consider are, is it one on one combat? or a free for all? how many npc's in this competition? is it a fight to the death, will you have to reroll your character every time you lose a fight?
now for the fluff, the first things i would be thinking about is why these mages are in this contest to begin with, is it voluntary? are they convicted felons perhaps? or gladiator slaves? but if they are there against their will, who is powerful enough to keep all these spellcasters from escaping, or killing the guards?
As i said, a very interesting idea.