By altering the strength of intra- and interspecific competition, droughts may reshape plant communities. Furthermore, species may respond differently to drought when other influences, such as herbivory, are considered. To explore this relationship, we conducted a greenhouse experiment measuring responses to inter- and intraspecific competition for two grasses, Schedonorus arundinaceus and Paspalum dilatatum, while varying water availability and simulating herbivory via clipping. We then parameterized population growth models to examine the long-term outcome of competition under these conditions. Under drought, S. arundinaceus was less water stressed than P. dilatatum, which exhibited severe water stress; clipping alleviated this stress, increasing the competitive ability of P. dilatatum relative to S. arundinaceus. Although P. dilatatum competed weakly under drought, clipping reduced water stress in P. dilatatum, thereby enhancing its ability to compete with S. arundinaceus under drought. Supporting these observations, population growth models predicted that P. dilatatum would exclude S. arundinaceus when clipped under drought, while S. arundinaceus would exclude P. dilatatum when unclipped under drought. When the modeled environment varied temporally, environmental variation promoted niche differences that, though insufficient to maintain stable coexistence, prevented unconditional competitive exclusion by promoting priority effects. Our results suggest that it is important to consider how species respond not just to stable, but also to variable, environments. When species differ in their responses to drought, competition, and simulated herbivory, stable environments may promote competitive exclusion, while fluctuating environments may promote coexistence. These interactions are critical to understanding how species will respond to global change.