EDIT: My post is super long and rambling. Short version.
Like the e-book idea, if implemented as follows. Only include the stories that win each month (the ones we publish anyway). Make this clear in the guidelines that already state they'll appear on the site. All this is is an alternate method to view what is already published anyway, so no more motivation for "cheating" than already exists. Give e-book away free to people who donate any amount through e-mail, don't sell directly.
LONGER POST BELOW
Hmm, an interesting idea fraught with peril! In other words, it must be a m3mnoch post. (Just kidding :p) I like the idea, but see issues.
To start, we all know (or should!) that Fantasy-Faction is funded by donations. So if we were to make an e-book of contest stories to support the site/forums, I feel like it should be sent to people who donate as a thank you gift for donators, not sold directly. Basically, it would be a nice bonus for people who donate to keep this site we all enjoy running. If that were the method of distribution (I imagine Overlord could add a link to the e-book in his "Thank you for donating!" automated e-mail) you would get a nice feel good treat for helping the site run.
As to the problems will selling it, there are two big reasons I think selling the e-book directly (say, on Amazon or other services) is a bad idea.
1) Even if authors opt-in and agree, it's still technically selling an author's work in exchange for "exposure", which has become somewhat of a dirty word to many authors today (and something more established authors advise newbies against, because it's so often BS). Also, what if they *don't* agree?
In this case, F-F is well known enough that I think there would actually be truth to exposure, but *only* if the included authors already have existing books for sale elsewhere. Because the authors aren't getting paid for their donated stories, they'd only benefit if someone liked a donated story enough to buy the author's OTHER WORK. So do you list their other work in the e-book? If you don't, why not? And what about people who have no other work to sell? It just gets complicated and messy fast.
2) Amazon and NOOK take a cut of every e-book they sell (that's why they'll sell anything!) and in some cases, a big cut (I assume other services are similar). If you were to price the e-book at less than 2.99 on Amazon, for instance, they would take 75% of the book price. That leaves on 25% of the price as an actual donation to F-F ... the rest is a donation to Amazon. >.> If you put the price above 2.99, Amazon's royalty drops to %35 ... but they're still siphoning money away from F-F, which seems to defeat the point.
Then, of course, there's also the financial and tax stuff. Amazon requires a real SS / bank account / etc before you can sell stuff, which means someone (presumably Overlord) would have to set that up on Amazon, which seems like a lot of trouble. If you have someone else running the account with their bank account, then donating the money to Overlord, you're adding more complexity and probably more fees. While setting up an Amazon author account for this might be something Marc is willing to do (if you're reading the thread, Marc, chime in!) there's still the issue of Amazon's cut.
So, in summary: since F-F is already publishing winning stories on the site ANYWAY, providing them in e-book format doesn't seem to be doing anything but offering another way to consume them. But it would make more sense as a reward (donate whatever amount you want, and receive a free e-book!) that a book sold on a vendor with a set price.
This assumes you could get a volunteer to format the stories in a readable format (Kindle and Nook are different, and I'm not sure about others) and actually create the e-book (I know you do it automated m3m, but I'm not sure how it compares to the quality vendors expect, as I usually read online). There's very specific things you have to do to get a book to look "good" in Kindle and Nook (I know, since I've published books!), to get chapter headings to work, and so on. So though you almost certainly know that, I just want to call it out for discussion.