Is it illegal to host a video game tournament, if there will be an entry fee and a prize for the winner?

You should get a lawyer to help you with this. California has strict rules about running any contest, which are in the California Business and Professions Code sections 17539-17539.3, 17539.35. However, those Contest rules do not apply if the people will be in person competing with their skills. So first you need to determine if this is an in-person contest or not. You will also need to check the licensing on the game you plan to use. You will probably need to get permission from the game company, since you would be using the name and photos from the game. The game company may not want to be affiliated with your contest and may not allow you to use their game for your money-making contest. You may be violating the game company's copyright as well as its right of publicity. If you choose to work with me on this, I will try to help you come up with a way to run a contest that is within the laws. Do not attempt to run such a contest without proper legal help.

Dear Questioner, Wow, great question the very fact that you are asking shows you are one step ahead of the game. First, a caveat: I can't give proper legal advice on a forum like this, so I'm going to talk about the law generally rather than how it applies to your situation this isn't legal advice. You should get actual legal advice before running your promotion. Speak with an attorney for a cheap consult on this issue, and bring along all the details. That said, I have clients who do promotions like this on occasion. The key is to avoid being classified as a lottery under Federal law. Generally this means you either have a game where the prize is awarded based on skill (like a Chess or Go match, or a video game tournament with a ladder (e.g. matches aren't just based on luck or drawn out of a hat), or you let people enter for free. We also have local Oregon laws about running these sorts of promotions. For example, see ORS (Oregon Revisions Statutes) section 646.651. In sum, you should plan out how you want your promotion to work in its entirety, then take that plan to an attorney for a quick consult to make sure it's okay. But in general, yes, these kinds of promotions (video game tournaments) are completely legal so long as you structure them appropriately and abide by Oregon's laws. Take care!