The arena is tremendous fun, challenging, and you get free magical armor, gold, plus free weapons you can sell.
Strange. You can't pick up the items of a vanquished enemy before you beat the Grey Prince, unless you use a plugin that is. But anyway, it's very true that the Arena is great to play.
The magical armor is the arena raiment that you must wear. There is more of it in the cupboards/closets too. You can't sell the arena raiment, but it is better than any you can loot from your standard bandit. When you level the armor stats on the ones in the closet increase also.
Additionally, there are axes, swords and maces in the racks which you can pick up and then sell to merchants. Alas, as you wrote, you cannot loot the other arena combatants. They drop some really cool weapons, but you cannot take any of it.
The question is not, Can they reason? nor, Can they talk? but, Can they suffer? ~Jeremy Bentham
