I used to be in the car business, (auto dealership) and can tell you one thing about competition, it is great. In the car business, most dealerships want to be around each other, as a matter of fact right by each other.
Many first time entrepreneurs are turned off by the idea of competition. Its overwhelming striking out on your own to form a new venture. But this is how I approach it.
Assume you are living in a town with only one tanning salon, and they have 100% of the business. You are worried that opening a new tanning salon might be a bad idea, because the existing shop has all the business locked up. The opposite is true. If you open a business, that offers exactly the same then the only business that may (and that usually is not the case) lose is existing tanning salon. You mathematically would be entitled to 50% of the market share.
Bottom line, business is never a zero sum gain.
There is always room for competitors.
Plus, if it an internet application its tough for a first timer to really grasp the size of the market out there.
What i would do:
1. Continue with the project.
2. Take a long hard look at all of your competitors. Borrow ideas from them that work, and innovate upon them, making them better.
3. Sell service, reputation, support and customer satisfaction.
4. Provide a better user experience. Lets face it, the fact that many people use macs is only mainly because of the user experience (something the Linux folks did not figure out for a while).
5. Be competitive on pricing, but do it carefully. You dont want to start a price war and hurt yourself and competitors at the same time. Dont bring down the market. Try to offer promotions. Even price higher, if you offer a higher level of product.
6. Monitor your competitors growth.
7. Build a restful relationship with your competition, they are the best potential parters for your venture. Never bad mouth them, this is bad practice. If you compare yourself to their service make sure to do it with respect and its usually best not to do it by name.
8. Consider conversion pricing, where if your customer comes from the competitor they get a different level of pricing.
Last, never go to bed sober. This alone has been the key to my success.