Google AdWords is where webmasters can pay to advertise their site. AdWords ads that people pay to place appear in two places: to the right of Google search results and also via Google AdSense, which is appearing on other people's sites, such as here on DaniWeb. In other words, Google AdWords is google's program where people can advertise their site. And Google AdSense is google's program where people can earn money advertising other people's sites.

I disagree that it is bad to advertise competitor's ads. Web surfers only stay on a site until they are done with it, and then they leave. If your site has something they want, and they like it, they'll stay no matter what. If they are ready to leave your site, they're going to leave no matter what. So why not at least earn a few cents each time one of your visitors is ready to leave?

Keep in mind: your visitor is always going to find your competitor no matter what. If they do a google search, your site is listed right alongside your competitor's. So if they're going to eventually leave anyways, and they're going to find your competitors anyways, why not at least earn a few cents at your competitors expense?

I would like to add that Google AdSense does display relevant, content targeted ads on your page. However, for the most part, these ads are not direct competition. For example, notice the ads posted throughout this site don't point to direct competition computer support forums - they point to other sites that would interest programmers, web developers, etc. In addition, Google AdSense offers the ability for you to create a list of domains you don't want advertised on your site. So you can always exclude direct competitors that way.