Based on my own experiences, I would say that it does both. I have seen myself (and people I've played against and coached) get better and worse under the pressure of competition.
The thing that usually goes bad in competition is that we have a hard time remembering to compete hard but yet not hate the opponent. In competition, it is so easy to start to hate your opponent because you want so badly to win. This can lead to all sorts of unethical and obnoxious conduct.
What competition does to bring out the best in people is to force them to be brave under pressure. When you are trying to perform and your performance affects whether you or your team will win or lose, you learn how to deal with pressure and the fear of failure
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