This is a quite realistic concern. There is a story going around from Germany were smaller online shops were the targets of link-blackmailing. If they refused to pay certain "fees" they were hit by massive amounts of destructive links, i.e. those with "sex", "viagra" or "porn" keywords. Some shops indeed refused to pay and promptly were loosing massive amounts of traffic/customers.
Here is the original story, unfortunately only in German:
http://www.golem.de/news/google-ranking-wie-ein-erpresser-ei...
It's very unlikely. This seems to be one of the reasons google has been turning what appears to be a blind eye toward paid links - it's hard not to throw out the baby with the bath water.
Exactly what I was thinking. Probably not any more than it would cost the website owner, however much that is. Depending on how successful your competition is and how much money you have in the bank this could be a viable strategy.
And the implications of that make me shiver a little.
(Disclosure: I have no idea how much it would cost. But my hypothesis is that it would be the same as if the website owner had done it.)