This link might provide a clue to to the beach question Professor Smitka posed on Monday. One of my best friends from high school works at Georgetown Cupcake while studying at Georgetown University. The same thing happened there, but to a larger degree: within four years of Georgetown Cupcake opening, there are now five stores that specialize just in cupcakes within a quarter mile radius.
The principle of minimum differentiation and the Bertrand paradox both apply in the cupcake cases. With the exception of brand name (which, granted, brand loyalty has huge influence), I’m not sure if anything short of a cupcake connoisseur could distinguish quality differences between a Baked&Wired cupcake and one from Crumbs. And yet, the price of one cupcake from any one of these stores is between $2.75 and $3.00, so there is minimum undercutting between firms and all of the owners go home making sizable profits.