So, I'm sure we're all aware of the tendency of "Sweet Dreams" to smack fellow players, even outside of the Coliseum.
This has inspired me. The option for each individual player to "take friendly fire" could open up a whole new world of gameplay.
In the options menu, check or uncheck the following:
-Take friendly fire from all (weapons, shield bash, pickups, sprites)
-Take friendly fire from swords
-Take friendly fire from bombs
-Take friendly fire from handguns
-Take friendly fire from misc (shield bash, pickups, sprites)
Obviously, defeating a fellow player would not make them drop loot, haha. It would just work like it did with the pillow. But just imagine the "realistic" difficulty of avoiding not only the attacks of the enemy, but also your friends! All your habits would change, and that's likely not a good thing, but man, what a mode of gameplay! It would be completely different and fun to do once in a while. Perhaps knights willing to train themselves under these harsh conditions could be recognized by Spiral HQ in some way. Ultimate difficulty level, engage!
EDIT: to be fitting, perhaps this could only be an option for the arcade, as I imagine Spiral HQ would want to minimize risk lore-wise for missions they send us into.
EDIT: to be clear, these options apply to you and you only. You can't edit someone else to take friendly fire from you, for example. You must...convince them to toggle it ;P
EDIT: it is likely this is best left as a personal challenge/friend endeavor. I imagine it would be used the most in training halls for fun. There's little incentive to make play a harder version of a game if there's not significant reward. Unlocking a difficulty level as Fangel suggested has a lot of potential, but you'd need to be extra careful joining a party that has the difficulty level of "you will suffer horrible death via friendly fire" enabled. But the loot could be upped quite a bit, considering it would be controlled fundamentally by the unlocked difficulty, and we all know difficulty levels influence a number of things, including that loot we want so very badly. I'd be in favor of "no pickups from boxes ever unless it's a heart box, then pills yes of course" with Friendly Fire difficulty mode. Considering how the game works, I'd imagine that FF would always be the highest difficulty, not an option per difficulty level, but that's up for debate.
Having an additional difficulty level would be neato. Granted, if we added friendly fire into the mix we should at least balance it back out with health revives for that difficulty only. Don't want an accidental team kill to lead to more sparks being forced to be used.
I'd say this be an "unlockable" difficulty. If you play through a mission on the "elite" difficulty, then you unlock this difficulty, and then can play through it with the friendly fire mode. This also means you'll have to run through an arcade on elite first before being able to host a party on this new difficulty, however you can be invited to parties in this mode without doing it yourself.
Prestige missions would follow the same rules, but since you can't replay most prestige missions you won't be able to use this difficulty (danger missions, dailies... However repeatable missions would be doable).