I doubt anyone is driving out competition with free product, but using free product to hook a new client is definitely a thing that happens.
That's not too say that there's guys on street corners offering free drugs to random passersby. Rather there's lots of dealers who just deal to aquaintances, friends, friends of friends, neighbors, etc. In that case they can spread a few hundred dollars worth of product around to non-users within their social network in hopes of picking up another client or two, who will end up generating reliable profit for a long time.
That's not too say that there's guys on street corners offering free drugs to random passersby. Rather there's lots of dealers who just deal to aquaintances, friends, friends of friends, neighbors, etc. In that case they can spread a few hundred dollars worth of product around to non-users within their social network in hopes of picking up another client or two, who will end up generating reliable profit for a long time.