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I'd tend to avoid sending your competitors link to Google, particularly if your goal is to take their place at #1. Doesn't bode well for the future..
The company isn't even local, it's across the country but when you click on it its loaded with the name of whatever city you type in with the keyword
This is fairly common for large 'authority' sites. I imagine they have a large number of backlinks.
These sites can rank highly across the board for deeper pages in their site, more so if the domain/site has been around a long time.
My advice would be to look for sites that focus on your area and try to get links from them. Also look for links relating to the subject in general.
Not only are you receiving links from on-topic pages, the links will help your goal of getting into the top ranks of related queries through search engines.
If you feel that the site lacks the quality required to be #1, you shouldn't have a problem ranking near or above it over the longer term.
[edited by: brotherhood_of_LAN at 4:32 pm (utc) on Aug. 26, 2008]
1) Webmaster has a topic and a list of X number of locations
2) Site runs using a scripting language that takes the URL and returns data based on the URL.
This isn't an issue exclusive to your competitor, and I agree that it can result in pages lacking quality or original content.
Instead, observe what they are doing, how they are doing it, and do it better. This is what competition really means.
It doesn't matter that they are getting results for every city in the country. What you need to do is figure out how to match or beat what they are doing - more content pages, more pages relevant to the topic, more pages relevant to your city.
Don't take this personally - since you mentioned web design and they are killing you in the SERPS, sometimes it just means they are better than you at their job and deserve that position. So you use them to learn from.
Black hat, I don't think so, "spammy," very likely. There are a great number of ways developers can dance along the edge of SE's spam tolerances and get away with it, but when you look at what they are doing, spam is still spam.
I see it all the time, particularly in the Real Estate Industry for some reason, they draw in keywords that have nothing to do with the topic in the interest of showin' 'dem numbers to a manager somewhere.
I have seen this help in the real estate business mentioned above; content is king!