Will 'Better' Link Building Win this War?

Quick question for you guys that I'd love some advice on if you could spare the time: I have a web 2.0 site that I have been ranking for an affiliate product I'm promoting. I started the site in September 2012 and in December 2012 it went to #1 for its Top 4 primary keywords (medium-level competition, around 25k global monthly all up.) At the beginning of Feb 2013 my site dropped slightly to number #3 - #5 for those keywords and the top 2 spots went to a rival who has set up a new web 2.0 site targeting the same product. According to MajesticSEO and Ahrefs his site has around 740 backlinks, all of which seem to be Scrapebox spam comments. Somehow his blogspot.com site is a PR2 though and is holding firm on those top spots. My site has around 7k backlinks, made up of a diverse amount of anchors, wikis, comments, guest posts, web 2.0s, directory links and bookmarks with some social media thrown into the mix too. My question is this, guys and girls: Even though his rankings have lasted 1-1.5 months, is this just a bit of a google dance? I don't want to start mimicking him and building dodgy links where he has placed them just to compete. I want to stick with my diverse approach and hope that, sooner than later, google will recognise the 'better' (see: more relevant) link profile. Is sticking to the path that I've been on so far (the one that got me #1 spots only a month or so ago) the best way to win this war? I appreciate the insight as always, guys and girls!

Apologies for the rubbish formatting. I've tried for 10 minutes to fix it and can't figure out what's wrong.

I'm not the best person to answer this but I do believe your method will surpass his and rank you higher within another month or two. It's just going to take some more time for Google to recognize your diversity. Good luck.

link building is necessary but i would add more unique content with lower keyword density and throw in a review video or 2 if possible.
google is going off its head just now and its not guaranteed that your competitor will get penalized for the crap backlinks, the only way you are guaranteed to beat him is by providing better content and an overall better website(blog)...

The answer is simple. Even if you have low content or not quality content in Google's eyes you can still beat him with backlinks. If you have a web 2.0 is great because you won't get a penalty for building links too fast or if you build low quality backlinks. So blast 1k or 2 backlinks just for diversification (many anchors, lot of raw urls) and 20 very high quality with your main keyword. In 2 weeks you should be back on track. Or you can try to replace the content with some better quality but I'll go for backlinks anytime.

ya..link building definitely works.

cinebixx

Content and decent links, I am sure you will pass him up.

I appreciate the insight, guys! The content on my site is actually quite high; the keywork density is about spot-on and I make sure everything I write is actually engaging and appealing to an actual person who comes to the site, not just for the search engines. Here's hoping that if I keep on the same path and sprinkle in an idea or two from above I'll knock this moron of his perch!

Unique Content is key my friend Do not point any shady links to your website im telling you, one day you might be #1 but because of that ONE SHADY LINK you could go from #1 to #290 in a day. I personally buy alot of cheap HIGH PR links in niches close to mine for my tier 1. I order from http://craigslistpvapostingservice.com/seo.html only because the staff really helps me and talks to me with great support. But there are other providers out there that can help you out with HIGH PR links .Remember to make GREAT unique content, your site will get more trust and overall..trust with Google = GOLD!

Tried to find our your mistake here but it looks like no results. Just wonder if your content is good? I mean high quality content: unique and readable. be patient and waiting for on other month. Hope you will get a high result soon.