It is against ebay's policies for two people at the same address to bid on each others items - as for in the same town etc - if it was a dummy bid to either hike the price or to avoid a sale then it's also against their rules, however I don't know how you go about proving it or how ebay go about investigating it.
With regards to your unpaid item I'd attempt to contact the buy through email and ebay's messaging system - give them a couple of days to get back to you and if they don't, send them another message declaring your intent to open an 'Unpaid Item' dispute with ebay unless they contact you or send payment by a set date.
If the date arrives with no contact or funds, open the dispute.
I would always make a couple of attempts to contact any buyer or seller first before contacting ebay or paypal -
(it may be that because you went straight to paypoal this guy's got his back up 
) - unexpected things happen, people make mistakes, computers fall over, servers go down, life in general just sometimes puts a spanner in the works.
Personally I would advise the above and then washing your hands of it and moving on. Is a petty little tit for tat thing really worth it? Blackmailing him - where's the point?