To me it's clear that the little kid is being bullied and the adults aren't helping. It is a shitty situation. Kids do need to learn conflict resolution. Kids also need to learn about violence -- not to perpetrate it, but to recognize it, respond to it, stay safe from it. Violence is an option in the world and kids need to learn to be protected from it and choose better options.
How do you teach kids to stand up to bullies? Somewhere in there has to be what to do in the case of violence, aka self defense, or pushing back if all else fails.
This kid does need to overcome this problem, although "restore his pride" sounds pretty gross.