A WebmasterWorld thread has an interesting conversation about linking to competitors. In this case, the webmaster is considering giving his competitor a banner ad direct link (not through a redirect or nofollow) but without an alt text, in exchange for links from the competitor.
The main issue is that his site and the competitor's site are neck and neck in the Google search results for similar keywords. He does not want to do anything that might give his competitor the edge in the search results, nor does he want to give his competitor a second (indented) listing in Google.
Senior member, Wheel, said in response to the question a short but insightful comment:
Swapping links with your competitor, when the entire point seems to be to gain an advantage over each other, is going to leave one party unhappy. Expect this to be short term.
StoutFiles added:
Unless you feel this would help you both move up from #2-#4 to #1-#3, this will be more trouble than its worth. Someone will likely assume they're getting the raw end of the exchange and call it off.
What would you do and do you link to competitors? Tag our anonymous poll:
Forum discussion at WebmasterWorld.
