AbstractThe usual conception of character displacement is of resource competitors differentiating to specialize on different prey in order to reduce competition. However, traits that underlie many predator–prey interactions, such as chase‐evade speeds, gape limitation, and toxin concentrations, do not permit such specialization, but instead result in unidirectional evolutionary arms races. Here, we develop and analyze an evolutionary model of predator–prey interactions to explore whether character displacement will still occur when such unidirectional traits define the species interactions, and if so, what environmental conditions foster or retard differentiation. Character displacement in predators and prey does occur, and this differentiation is driven by fitness component trade‐offs. Instead of specialization or compartmentalization in which different sets of species have strong interactions, differentiation in this model causes a nested community structure in which species of predators and prey have the same rank interaction strengths with species at the other trophic level. Also, analyses of the model predict that character displacement is fostered in environments with higher productivity, weaker stressors, and lower structural complexity. Model comparisons suggest that character displacement should occur over a broader set of environmental conditions when traits permit prey specialization than when traits foster arms races. These results highlight how different types of phenotypic traits that underlie species interactions shape the species diversification and the structure of the resulting community.