Quality incoming links are the best way to improve your web sites rank; so an open link exchange policy is good idea, helping make your site more visible on the ever more crowded web.
Should one exchange links with ones competitors?
In the virtual world, as well as the real world, it is useful for the customer if people offering a similar service are grouped together. That is why on the high street you will often find a number of shops all doing the same thing.
People like choice: I think it makes much more sense to be grouped together rather than invisible and alone.