It is an ecological imperative that we understand how changes in landscape heterogeneity affect population dynamics and coexistence among species residing in increasingly fragmented landscapes. Decades of research have shown the dispersal process to have major implications for individual fitness, species’ distributions, interactions with other species, population dynamics, and stability. Although theoretical models have played a crucial role in predicting population level effects of dispersal, these models have largely ignored the conditional dependency of dispersal (e.g., responses to patch boundaries, matrix hostility, competitors, and predators). This work is the first in a series where we explore dynamics of the diffusive Lotka-Volterra (L-V) competition model in such a fragmented landscape. This model has been extensively studied in isolated patches, and to a lesser extent, in patches surrounded by an immediately hostile matrix. However, little attention has been focused on studying the model in a more realistic setting considering organismal behavior at the patch/matrix interface. Here, we provide a mechanistic connection between the model and its biological underpinnings and study its dynamics via exploration of nonexistence, existence, uniqueness, and stability properties of the model’s steady states. We employ several tools from nonlinear analysis, including sub-supersolutions, principle of linearized stability, certain eigenvalue problems, and a numerical shooting method. In the case of weak, neutral, and strong competition, our results mostly match those of the isolated patch or immediately hostile matrix cases. However, in the case where competition is weak towards one species and strong towards the other, we find existence of a maximum patch size, and thus an intermediate range of patch sizes where coexistence is possible, in a patch surrounded by an intermediate hostile matrix when the weaker competitor has a dispersal advantage. These results support what ecologists have long theorized, i.e., a key mechanism promoting coexistence among competing species is a tradeoff between dispersal and competitive ability.