I think it more likely they're trying to pick up some of the market that isn't yet using a respectable browser. While that might be competition, in that Firefox too would like to snatch up these users, I see it not really undercutting them so much as presenting themselves as a more viable transition.
It has the advantage of being the property of a name, google, that is as well known as Microsoft--which by name familiarity alone may make for a less anxious transition than IE to Firefox. When trying to get someone to use Opera or Firefox from IE, I've often found resistence because they want to know what the hell a firefox is and why it has such a silly name--often assuming it's some weird flybynight thing and I've been duped. It's not as common now as it once was, but I still encounter this situation.
But tell them to switch to google's browser--I can see the conversation playing out already, with non-technical users who fumble with the Internet. "I use google all the time, they have a browser? That makes sense... can I import all my favorites? How do I get it?"
I doubt Chrome will be a viable alternative to Firefox or Opera for power users who have been using/tweaking configuration/extension combinations for years, have a work flow they are comfortable with . . . I can easily see chrome taking market share from Internet Explorer, but not so much firefox.