It doesn't. There's no direct competition, as we see it — there are different market segments.
Here is the quick illustration: http://www.black-swift.com/images/wiki/BlackSwift-competition.png
Raspberry is powerful and relatively big — if you consider it for embedded use, probably you don't need that much power and don't have that much space. Arduino has some tiny versions, but it's 8-bit AVR — no complex algorithms, no Web interface, no databases, etc.
So if you need standalone module only — Raspberry is a great choice, look no further, seriously. If you need simple and easy to use MCU (microcontroller unit) — Arduino is great.
But if you need something small *and* powerful *and* easy... here is the problem we are trying to solve. Once again, it's not about competition — it's mainly about market segment and requirements not satisfied by other products.