If you just opened in May, and the competitor is even newer, neither of your businesses have any value beyond inventory and equipment. Use the failing economy to your advantage. Bigger stores come with bigger overheads, that gives you an edge. I wouldn't recommend a price war unless you have deep pockets, it'll probably hurt you more than it helps. It'll cut into your margins making it tougher for you to pay your bills. Offer a loss-leader occasionally to bring in traffic but to lower your prices to drive him out, probably won't work. Continue to work your businessplan and stay the course, and don't borrow...that only diminishes your margins.
Good luck