The suggestion that WotC is not "competing" against Paizo is fallacious. It assumes that those customers who purchased Pathfinder products were never going to purchase 4E products, no matter what. Take away that unjustified and breathtakingly dismissive assumption - and that argument has no clothes -- and no logic.
It is neither unjustified nor dismissive. It's an observation.
To a first approximation, there are two kinds of gamers: those who buy multiple games, and those who pick one game and stick to it. Among these latter gamers, the products are not like toothpaste here having gotten one means they won't get another. The competition here isn't so much with each other as it is with the customer's internal guidelines as to hat makes a good game. Buying Pathfinder does not mean this person won't buy 4e, so they aren't really in competition for this customer.
For the latter bunch, there's more strong competition in general. However, for 4e the dynamic here is more complicated. When 4e came out, people didn't need Pathfinder, or anything else, to continue playing 3e. Given the controversies, and the differences between 4e and 3e, I honestly don't think Pathfinder's existence (at the time, still a beta-test question mark) was a major player in the decision to not play 4e. I think the folks who play Pathfinder would have stuck with 3e anyway. They are, I suspect, much better off and happier because Pathfinder exists, but that's a different concern.
If folks weren't going to buy 4e whether or not Pathfinder existed, then they aren't in competition.
In a couple years, this argument will no longer hold - we'd be talking more about people who have to make a fresh choice between the games, and they'll be in more direct competition. But for now, I don't think Pathfinder sales are noticeably cutting into 4e sales.
Did WotC expect this would happen? Not a frikkin' chance.
Well, I think WotC did full well expect to lose some 3e players when they brought out 4e. Whether someone else picked them up afterwards wasn't really a concern, as they would have been lost either way.