You can't use the third-party plural form compete as it doesn't have its subject and conjunction. When you have two clauses linked, i.e.
*(1) Advertising revenue funds development of products and services these competitors provide to users at no or little cost, (2) compete directly with our revenue-generating products. ( * indicates it's grammatically wrong)
You have to use a conjunction and a subject as in
(1) Advertising revenue (Subject No. 1) funds (Verb No. 1) development of products and services these competitors provide to users at no or little cost, (2) and (conjunction) they (Subject No. 2) compete (Verb No. 2) directly with our revenue-generating products.
or
(1) Advertising revenue (Subject No. 1) funds (Verb No. 1) development of products and services these competitors provide to users at no or little cost, (2) which (conjunction + Subject No. 2) compete (Verb No. 2) directly with our revenue-generating products.
In order to omit the conjunction and the subject, you have to change the verb form compete to its present participle form competing which can be used without a subject and a conjunction as in your original sentence.
You need to note that the subject of a dangling (participial, absolute) clause is not always the subject of a main clause. You can compare the following two sentences:
(1) Advertising revenue competes directly with our revenue-generating products.
vs
(2) Products and services these competitors provide to users at no or little cost compete directly with our revenue-generating products.
If the subject of competing is Advertising revenue, it should be No. (1) and if the subject is Products and services ..., it should be No. (2).
The following sentence is another example where the object of a main clause is the subject of a dangling (participial) clause.
Matisse watched the elder painter working in his studio, fighting torturous pain with each brush stroke.
[Source: The Best of Bits and Pieces by Arthur Lenehan]
It is very obvious that the subject of fighting is the elder painter, not Matisse. As you can see, the subject of a dangling (participial) clause should be identified based on the context and meaning. There is no such a rule that stipulates the subject of a dangling (participial) clause is the subject of a main clause.
You can google dangling clause, participial clause, or absolute clause for further information and study. It's not important what to call it.