RE: How to compete against link buyers:
If you feel the urge to report them, then go ahead. It's a free country, and I don't think it is immoral to report them. I know that if I came across a blatantly bought link to my competitors and I DIDN'T report them, my wife would think I was an idiot*.
I am not sure it is all that effective, and I think that developing links to your site, or building social buzz that will lead to natural links, might be a better use of your time. But I don't see why you can't do both.
In terms of link building, webmasterworld has the very wonderful link development forum, which is at [webmasterworld.com
...] and if you search through the library in that forum, you will get lots of good ideas. In particular, do look for any threads created by either MartiniBuster or by wheel, whom, it appears, you have met already ;)
I think that the strategy for getting links is going to be similar to the same strategy any business would have for getting customers - and I suggest that you think of people you want to link to your site as your customers. So, think of what you have to offer (your competencies), think of what your customers (link partners) want or need, and think of what your competitors CAN'T offer those customers (or what your competitors haven't realized yet they can offer your customers).
Where those three things meet (your competencies, your customers needs, your competitors deficiencies) is where your competitive advantage lies. Use that for getting links as well as for customers.
However, as wheel mentioned, do be prepared for some medium to long term lead times. That is because your competition is lazy and they will take the path of least resistance (i.e., buy links), and if you could put in a bit of hard work, creative thinking, and determination, then you will come up with something special.
It's like the joke goes about the two hikers in the woods who run into a bear; you don't have to outrun the bear - you just have to outrun the other hiker.
I hope this helps. See you over in the link development forum.
*Truth be told, my wife kind of thinks I am an idiot anyway, so I don't report every paid link I see...