For note:

The idea of putting Pokemon up for grabs, and their owner being decided by a battle, inherently conflicts with the ideas behind Pokemon to begin with. Pokemon are not slaves. They are not prizes. They are not mindless machines. They are your partners, friends, and traveling companions. Items, however, are fine for this purpose.

So, I would be against any idea that promotes them as anything other than that. It would not increase competitiveness, as you claimed. Most users would be extremely lax to put any of their prized Pokemon in such a position. Not only that, but it would be exceedingly easy for veteran players to pressure newer players into such battles in order to walk away with their Pokemon, unless severe limits were placed on the battles.

In short, no. I would not like to see something like this. There are other ways to squeeze competitiveness out of battles, as seen through competitive battling on sites such as Smogon.

I already addressed the issue of reporting.

Just had to say, none of the main characters of the anime/games used pokemon as simple slaves, but it was a common attribute of rivals/team rocket.  So this concept is not entirely non-cannon.  I also feel like ash did this to get butterfree back, but that was a long time ago for me, so im prolly wrong.
On topic: I think it would add to the game, especially for items, but it would have to totally mandatory, and there would have to be some method of protecting new players from doing so foolishly.
Unrelated question: are there going to be any master balls in PU?