When I first started my business, I did some covert pricing of my local competition. Trust me, everyone checks out everyone else. You definitely need to stay competitive, but it also needs to be worth your time. Your "Local competition" does not include grocery stores. Most of those cakes are mass produced at a huge factory and shipped in frozen.
When people tell me I can get it for x amount at costco or walmart or albertsons, I very nicely tell them that I don't get my ingredients wholesale, so I can't afford to sell them the cake for the amount. I also explain to them what makes my cakes better, but if they still choose to go with the grocery store cake, I don't let it bother me, 9 times out of 10 when they get that cardboard grocery store cake, they come back to me next time.
When you start getting into higher dollar items, a lot of people don't understand what all goes into our art. They see a 30 or 60 minute show on food network in which an entire beautifully sculpted cake is made, and they think, that wasn't so bad, and mine is much simpler than that, so it shouldn't cost much. They don't see all of the behind the scenes work and premade items and assistants scurrying around off camera.
I had a wise (and also successful) bakery manager tell me something that has stuck... "It's their loss." I had to learn to charge what I knew I was worth, good or bad. If I take less money than my time and art are worth, then I'm basically paying them to eat my cake, which doesn't make good business sense. If they come to me, and I give them a quote, and they don't want to pay it, I don't take it personal, I just move on to the next order. It's their loss.
And like someone else said, it's hard to raise your prices later, especially when you start getting repeat customers. Figure out your cost, pay yourself a decent amount of labor, and compare to the competition. Set your prices and stick to them. You'll be happy you did.