Correct me if I'm wrong, but it really seems that the libertarians are working in tandem with the democrats here.
Okay, I will. You are approaching it from the point of view that the Republican incumbent has some sort of moral claim on his seat. Badnarik, is simply trying to unseat him and is using an age-old tactic to do so: tell the weakest participant that he can't win, so why not withdraw? Democrats and Republicans have both used this tactic on third-party candidates for ages, but anyone who would have the temerity to point out that such tactics would seem to have the Republican or Democrat "working in tandem" with their opposite would be greeted with truckloads of ad hominem.
Furthermore, the tactic is hardly flattering for the Democrat. Badnarik is openly calling him a loser. It is patently silly to suggest that such behavior is collusive.