If people are specifically looking for his business he doesn’t want the competitors business to be able to buy an ad that pops up before the user searching for his business.
That has nothing to do with wanting free traffic for nothing. This guy has likely already built a website that is optimized for google search, likely uses paid gmail/google apps, probably registered all his info in google maps...that’s a lot of free data entry for google so their product is better and some of those business services are paid.
So now that you use their paid services and probably paid for web development/SEO up to Google’s lastest standards, your business comes up #1 on google searches...and they sell an ad before your result.
There is no great real world example, but imagine you have a brick and mortar and sign a commercial lease in a shopping center, then the landlord rents signage in front of your sign to a competitor. Of course he’d always be happy to rent you the 2nd signage if you beat your competitors bid.