One thing that I feel should be mentioned, but hasn't, for whatever reason, is the precise emotional state of the M&Ms in question
Presuming this sort of culling is meant to ultimately produce a race of "Uber M&Ms" (if you will allow), I think this factor must be taken into consideration.
Imagine you have just cast the M&Ms out upon the table like the bones of a soothsayer, and then you begin to separate the men from the boys in whichever of the above mentioned methods (either the playoffs or the "King of The Ring" method). The blues and yellows, browns and reds, greens and other, are now forced to watch as their brothers/sisters are forced to engage in a stress test to the death a la Kirk v. Spock.
These would have to be some pretty cold candies for them not to feel the tension, with the oppression of a suspense-stained curtain billowing over them. Some, I hypothesize, would mentally crack under the pressure, breaking down into a candy-coated coma.
The only way to protect against this sort of emotional trauma (but not the ruthless slaughter) would be to separate them right out of the bag. Then, you could bring them each in, one by one (or two-by-two, depending on method selected) to face their opponent. Of course, many valuable traits that would (following the natural course of evolution) become prominent would instead find themselves undesirable; these would be traits are being bred out in favor of just one allele. This leads to a limited gene pool !!!
I conclude that we should not force our beloved M&Ms to give up their previous traits which have made them great e.g. color coating, simply in favor of dull-witted structural integrity!? After all, where is the fun in that?
All Editing by : OneDragons