The dynamics and lateral interactions of dipolar chains in magnetorheological suspensions determine the long-time microscopic structure and resulting rheological response. In this paper we characterize proposed lateral interaction mechanisms and their implications for long-time coarsening of structure and compare them to direct measurements of the lateral interaction of dipolar chains using optical trap micromanipulation. We observe a long-range far-field attraction between flexible chains, while the near-field interaction can be repulsive or attractive. At high field strengths, we observe the short-range attraction of rigid chains. Chain dynamics measured with videomicroscopy and diffusing wave spectroscopy are described by a local-mode model and are consistent with fluctuation-mediated interaction theories. The subdiffusive behavior at intermediate and long times scales as t 0.75, identical to semiflexible molecules. Finally, we show examples of how defects in chains can create lateral attractions or repulsions.