Competition is a major factor structuring plant communities and controlling their productivity. The functional similarity between the interacting species and the context resource availability are assumed to be most critical factors that modulate the strength, sign, and outcome of plant competition, yet their roles and interactions are subjected to debate. In a glasshouse experiment, we constructed monocultures and bi-specific cultures of three common perennial grasses of Mediterranean drylands, the short grass Brachypodium retusum and the tussock grasses Stipa tenacissima and Lygeum spartum, and investigated how the functional similarity between these species modulate their interactions and culture productivity under contrasting levels of water availability. Regardless the degree of functional similarity between the interacting species, B. retusum consistently exhibited a greater competitive ability than the other two species, followed by L. spartum, and with S. tenacissima behaving as the weakest competitor. Bi-specific cultures of B. retusum and either L. spartum or S. tenacissima produced higher biomass than the average biomass of the respective monocultures (i.e. overyielding), whereas the combination of the most similar species, L. spartum-S. tenacissima, which exhibited the highest competition symmetry (i.e., the more similar mutual impact), did not show any significant overyielding. Higher water availability increased productivity and promoted transgressive overyielding for the most dissimilar species, B. retusum and L. spartum, which however exhibited intermediate competition asymmetry. This study calls attention to the thin line between differences in functional traits and competition asymmetry that could eventually lead to either competitive exclusion or resource partitioning and coexistence.