Forum Moderators: open
Patrick
Don't jump to the conclusion that your competitor is bidding over $2.50 just because he is on top. That's because your adwords position depends on the combination of Click through rate and keyword bid price.
Check (4. Position) under [adwords.google.com...]
You'll never know - your competitor maybe paying $1.00 per click but might be having a CTR of 10%. In that case, your competitor's rank would be 10.
What is your overall CTR? Multiply that with $2.5 and you will get your score. Run the campaigns for a couple of days and see if you can beat your competitor. If not, either raise your CPC or your CTR. I don't suggest that you increase your CPC because you are paying way too much already.
Read Google AdWords manual thoroughly.
Good Luck!
Ashwin