If you would use the competitor and be completely happy with it then drop it. If you are confident in your ability to provide a better value add then the competitor then charge ahead. Your only loss is a little time.
The issue here is that my product is definitely better designed, and can match (perhaps even slightly bypass) the technical capabilities of the rival product!
But It'd be safe to say the following — The "rival" has established a (4-5k people) community around the product, and my better designed version aims to build a larger community of users. I'm not going to be charging, and neither is he.
If you both aren't going to be charging for it, is the other one open source? Is there some kind of arrangement you two can make to work together?
Both mine as well as the other one is open source, but I don't know how to go about a merger.
If you pose any threat to your competitor, they'll knock-off your features before you get off the ground. Then, you lose your main selling point and you're left in the dust.