In a ruling on Monday, Google won a victory allowing them to continue to display rival competitor ads when trademark keywords are searched for. For example, through AdWords Pepsi can set up bids so that their ad displays when someone enters a search for "Coca-Cola.”
Depending on the strength of your brand, using a competitor's trademark may work for or against you. As a smaller company, or perhaps a second or third place company behind a clear industry leader, display keywords based on the leader can help the user understand that there are clear alternatives. For example, Avis may want to advertise when someone searches for Hertz.
In some cases where a brand name has been commonly adopted as a term (think "Band-Aid" versus "bandage"), it's certainly reasonable for a competitor to have bids set up so that their ad displays when a consumer searches for “Band-Aid.”
For advertisers this is a very complex issue as the cost of competitive clicks like this often gets to be extremely high due to very low quality scores on another company’s brand terms. Add to that a low conversion rate because the visitor is looking for something else, and you have all the ingredients for bad business and emotional spending. Understanding the cost and effectiveness of these keywords is vital.
But what about if you're trying to protect your brand? The best thing that you can do for your brand is to make sure that you show up in a top position for both Organic and Paid search results. The owner of the branded term in question can advertise for very little spend due to very high quality score. Also - when you purchase the ad, it takes up space on the page that might go to a competitor. Think about it like guarding your virtual turf.
Of course many companies choose not to do this and end up giving away traffic to competitors. Finch has a free white paper called "Why should I pay for clicks on my own trademark or domain names?" that provides a lot more inside on this topic.