maybe they are a known brand? at least more known than you since they were around longer than you... so they probably get higher CTR...
like if you search for "domains"... godaddy will get higher CTR and will outrank MikesDomains.com, no matter what mike does, or what goddady does...
godaddy could put "We will scam you" as the ad, and link to a landing page with porn, and they will still outrank and pay less per click than MikesDomains.com
also, since your competitor is pretty cheap, they get much lower bounce rate than you, helping him "rank" high...