What happens in competition between two species?

The correct answer is Option (2) - The fitness of one species is lowered in the presence of another.

Competition: Competition is best defined as a process in which the fitness of one species (measured in terms of its ‘r’ the intrinsic rate of increase) is significantly lower in the presence of another species. It is relatively easy to demonstrate in laboratory experiments, as Gause and other experimental ecologists did, when resources are limited the competitively superior species will eventually eliminate the other species, but evidence for such competitive exclusion occurring in nature is not always conclusive.  Connell’s elegant field experiments showed that on the rocky sea coasts of Scotland, the larger and competitively superior barnacle Balanus dominates the intertidal area, and excludes the smaller barnacle Chathamalus from that zone.