In structured environments, antibiotic-producing microorganisms can gain a selective advantage by inhibiting nearby competing species1. However, despite their genetic potential2,3, natural isolates often make only small amounts of antibiotics, and laboratory evolution can lead to loss rather than enhancement of antibiotic production4. Here, we show that, due to competition with antibiotic-resistant cheater cells, increased levels of antibiotic production can actually decrease the selective advantage to producers. Competing fluorescently labelled Escherichia coli colicin producers with non-producing resistant and sensitive strains on solid media, we found that although producer colonies can greatly benefit from the inhibition of nearby sensitive colonies, this benefit is shared with resistant colonies growing in their vicinity. A simple model, which accounts for such local competitive and inhibitory interactions, suggests that the advantage of producers varies non-monotonically with the amount of production. Indeed, experimentally varying the amount of production shows a peak in selection for producers, reflecting a trade-off between benefit gained by inhibiting sensitive competitors and loss due to an increased contribution to resistant cheater colonies. These results help explain the low level of antibiotic production observed for natural species and can help direct laboratory evolution experiments selecting for increased or novel production of antibiotics.