This is a great Question.
For us, it goes back to the philosophy we started with. We were determined to build a collaborative business relationship with anyone we could, including other bed and breakfasts. We got off to a slow start, because the nearest property was not doing very well and getting bad reviews. So we started putting it out there to the universe that we wanted some other properties in the area that we could refer to and that we wanted to build some partnerships within a fragmented B&B association.
It's been about a year since we stated down that path and we now have four partner inns that we do around the island packages with (which is quite popular) and we have a couple of other partnerships in the works. We have developed some partnerships which have allowed us to barter or exchange, some that have given us mutually beneficial exposure, and some that give everyone involved the potential to be display their niche.
Quite honestly, we can't imagine having to compete with these inns. Instead we all work to highlight what we do best and readily encourage guests to consider our partners if our geographics or style doesn't work for them. With everyone doing the same (we are very grateful for the many referrals we get from other inns) it works well for all.
Lastly, we now have an inn near us that has joined our association and a ranch that rents cottages that we can readily refer guests to if they have different needs or budgets. It's a great feeeling to know that we are helping someone in our community.
In the end, we have a lot less stress collaborating than we would competing, and our business has improved in every way. Now we get our perfect guests and our partners get theirs.
Whew!