More wisdom from "The Wizard", FeedBurner's founder, Dick Costolo. Dick writes a great blog, well worth adding to your reader.
To whit: always focus on your goals, not on your competitors.
When you focus on your company's goals, you are focusing on something you have control over, you make strong decisions, and everybody knows what success looks like. When you obsess about your competitors, you are focusing on something over which you don't have control, you make bad decisions, and nobody is sure what success looks like, since the company's actions are in reaction to a third party. Being fiercely competitive is fine, you can hate that your competitors are performing better than you, and you can be hyper-paranoid about what might happen to your business, but the best way to compete in the market is to focus on those things you can strive toward independent of what anybody else does.
Coincidentally, we think Dick's advice is also spot-on for winning at paid search. In most cases, you should bid based on your goals, your priorities, your economics, your margin, your conversion. While in rare cases it might make strategic sense to chase a competitor up and down the page with bidding games, usually such strategies destroy more value than they create.