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If your answer is "pretty p!ssed off", then don't do it. You will be targetting a competitor and they will know about it.
Like Mike said, you can cover yourself, but do you really want to start a battle? Can your business afford to maintain a sustained level of marketing and advertising to counter any offensive by your competitor? Is your site squeaky clean (its likely to be picked apart by your competition)?
Is it ethical? No, probably not, but its business. Just be prepared to face any consequences. :)
Just my opinion though!
Is it considered unethical to bid on a competitor's name for a competeing product
Google's opinion - NO
(Do a search for OVERTURE in Google and you will see Google AdWords ads under Premium Sponsorship)
My personal opinion - NO
IMHO, forget "ethics" and bid for it if the price is attractive. However, if you do get a request from your competitor to remove the ad, you should probably get rid of the ad.
Totally pissed me off but I have not asked them to remove it. Instead, I used their company name as a title on one of my web pages ... just to see if there is any reaction. Nothing so far, but its only been a month and I'm guessing they haven't noticed it yet!
If you are going to do it, be prepared for the pay back! :)
I suspect that visitors who found you because you took advantage of competitors' names would not be as productive as people who found you in other ways. If you did decide your ethics were loose enough to do that sort of thing, some careful tracking and analysis would be in order to make sure it was cost-effective.
If you are competing against a Walmart, they won't even take notice. Compete against some company of similiar size, they will take it personally, and the price wars and other bad stuff will start.
Don't start any battles, that you can't either
b) run away from fast.