There are a few things about the rules of the tournament that I don't understand.
The first is more of a relatively minor story mistake I think. The tournament is obviously supposed to be Single Elimination. And since Shang Tsung declared Scorpion vs. Sektor & Cyrax as an official match, that should mean Sektor & Cyrax were both eliminated from the tournament. But then later on Shang Tsung is still able to assign Cyrax as Johnny Cage's opponent. They could have avoided this if either of Cyrax's fights wasn't an official match, or if only Sektor had fought Scorpion. Still, pretty sure this one was just a writing screw-up and not indicative of any tournament rules.
The next thing is exactly who is allowed to participate, which has multiple parts.
1. The tournament is pretty much the Merger vs. the potential merge-ee. If that's the case, how are Quan Chi and Scorpion able to fight when both should technically be representing the Netherrealm (ie. a third party)? If either of them had won, would it have counted as the first victory (of ten) for Netherrealm?
Granted, since Quan Chi was pretending to be Shao Kahn's ally and Scorpion was only their for Sub-Zero, both probably would have bowed out of the tournament if they beat Liu Kang (since only Goro would be left then). But even as allies they wouldn't have counted as Outworld participates based on what Bo Rai Cho said in Deception (assuming that's still canon), and we know Scorpion doesn't represent Earthrealm anymore because he fights Liu Kang after Shang Tsung declares Liu Kang as the last warrior from Earthrealm.
2. As a side note, maybe I missed it but when did Sonya get eliminated? The last match I remember her being in was against Kano and she won. And couldn't Jax volunteer to participate in the tournament if he wanted (especially since he had been healed to full strength)? All of sudden Shang Tsung was just "Liu Kang is the last from Earthrealm..."
3. I assume there must be some sort of limit on how many participates can be entered from each realm, otherwise Shang Tsung would have stuffed the roster with 100,000 tarkatans, shokans, etc. I mean, I guess you could kind of get around that by saying Shang Tsung was confident nobody would beat Goro so he only brought a handful, but still (even then, he only really brought Reptile, Baraka, and Ermac since I don't think Kitana and Jade fought in any official matches).
4. How does it determine what realm you represent? Is it where you were born or where your race originates? (I'm assuming if your realm is merged into Outworld, you then count as Outworld for the purposes of the tournament). The reason I ask is because in Sheeva's ending the shokans move to Earthrealm and so I was curious as to if any earth-born Shokan could fight for Earthrealm in future tournaments or if they would still count as Outworld (yes, her ending was non-canon but still).
5. Had Liu Kang technically saved Earthrealm when he beat Goro? Goro was the champion, but Shang Tsung had apparently twisted the rules so that you had to beat the host of the tournament as well? But Shang Tsung is from Earthrealm so if he had beaten Liu Kang wouldn't that have still counted as Earthrealm's victory or would it somehow invalidate Liu Kang's defeat of Goro?
