So in your scenario, two people who were willing to die are dead.

No, in my scenario, two desperate and vulnerable people are exploited to fight for money, where neither of them are willing to die (and that's why they try to win), but one is dead.

One mobster is going to prison for murder.

Why is he going to prison? Who said he was caught? I never said he was caught. You just assumed he was. He is a mobster, he commits a lot of crime. He hasn't been caught for those, what makes you think he will be caught for this?

And everything else that is wrong has to do with gambling

Which is relevant to my base point that it is open to exploitation by nefarious people.

which already happens and is unrelated to this legal duel hypothetical.

It does already happen, but does that mean we should culture more of it? And, given the scenario, it is entirely related to it, because without the gambling element there is no motivation for the mobster to get these two men to fight in the first place...?