If a store sells a certain product, may somebody else open a store nearby that sells the same product at a discount and with promotional offers, such as special gifts for purchases above a certain amount?
The Shulhan Aruch (Hoshen Mishpat 156:5) rules that one may open a competing business near another store, provided that he either lives in that city or at least pays taxes to the city. Even if he is not a resident of the city, since he pays municipal taxes to the city where the business will run, he may open the business, make sales and aggressively advertise his merchandise or services. What more, later in Hoshen Mishpat (228:18), the Shulhan Aruch allows a competing business to promote his products by distributing free candies to children to attract customers. Halacha looks upon all such activities as within the accepted norms of commercial competition which need not be discouraged. A preexisting business thus may not prevent a competitor from opening a business nearby, and should instead rely on the Almighty's ability to provide everybody with a proper livelihood.
One may not, however, advertise products or services by disparaging the competition. Although Halacha permits one to aggressively advertise his business and employ innovative promotional techniques, it is strictly forbidden to smear the reputation of a competitor. Acceptable commercial competition does not give license to publicly malign or disparage competitors.
Summary: It is permissible for a competing business to open near a preexisting business and sell the same products, and even to advertise and offer promotional incentives to attract customers, provided that he pays taxes to that city. It is forbidden, however, to run an advertising campaign that damages the competitor's reputation.
See the book- "Pure Money" by Dayan Cohen, pages 184-184.
