Behavioral and modeling evidence suggests that words compete for recognition during auditory word identification, and that phonological similarity is a driving factor in this competition. The present study used event-related potentials (ERPs) to examine the temporal dynamics of different types of phonological competition (i.e., cohort and rhyme). ERPs were recorded during a novel picture–word matching task, where a target picture was followed by an auditory word that either matched the target (CONE–cone), or mismatched in one of three ways: rhyme (CONE–bone), cohort (CONE–comb), and unrelated (CONE–fox). Rhymes and cohorts differentially modulated two distinct ERP components, the phonological mismatch negativity and the N400, revealing the influences of prelexical and lexical processing components in speech recognition. Cohort mismatches resulted in late increased negativity in the N400, reflecting disambiguation of the later point of miscue and the combined influences of top–down expectations and misleading bottom–up phonological information on processing. In contrast, we observed a reduction in the N400 for rhyme mismatches, reflecting lexical activation of rhyme competitors. Moreover, the observed rhyme effects suggest that there is an interaction between phoneme-level and lexical-level information in the recognition of spoken words. The results support the theory that both levels of information are engaged in parallel during auditory word recognition in a way that permits both bottom–up and top–down competition effects.