Spatial separation within predator communities can arise via territoriality but also from competitive interactions among and within species. However, linking competitive interactions to predator distribution patterns is difficult and theoretical models predict different habitat selection patterns dependent on habitat quality and how competition manifests itself. While models generally consider competitors to be either equal in ability, or for one phenotype to have a fixed advantage over the other, few studies consider that an animal may only have a competitive advantage in specific habitats. We used 10 years of telemetry data, habitat surveys and behavioral experiments, to show spatial partitioning between and within two species of reef shark (grey reef Carcharhinus amblyrhinchos and blacktip reef sharks C. melanopterus) at an unfished Pacific atoll. Within a species, sharks remained within small ‘sub-habitats’ with very few movements of individuals between sub-habitats, which previous models have suggested could be caused by intra-specific competition. Blacktip reef sharks were more broadly distributed across habitat types but a greater proportion used lagoon and backreef habitats, while grey reef sharks preferred forereef habitats. Grey reef sharks at a nearby atoll where blacktip reef sharks are absent, were distributed more broadly between habitat types than when both species were present. A series of individual-based models predict that habitat separation would only arise if there are competitive interactions between species that are habitat-specific, with grey reefs having a competitive advantage on the forereefs and blacktips in the lagoons and backreef. We provide compelling evidence that competition helps drive distribution patterns and spatial separation of a marine predator community, and highlight that competitive advantages may not be constant but rather dependent on habitats.