In a flashback to the night Melissa and Josh meet, four years and two months before Schmigadoon, Melissa tries to analyze their relationship while Josh is content to believe their relationship is stable.
In Schmigadoon, they try to figure out why they can't leave. Josh concludes that their love isn't true love. Melissa is upset that he's just giving up on their relationship. The townsfolk approach and the music starts. The ensemble number "Lovers' Spat" starts.
They escape the group by the bridge but the number continues when they arrive in the town.
They call it quits. Melissa gives Josh permission to find true love with whomever he wants and walks away.
Melissa walks into the woods to cry alone and comes across Mayor Menlove contemplating a glade. He notices her crying and gives her some advice and performs a solo song, "Somewhere, Love is Waiting for You," subtly implying he is gay while singing in an Italian accent.
Melissa takes comfort and takes the opportunity to throw away the stone heart with Josh's name on it that she was given at the couples' retreat. Menlove throws a rock too, hitting Pete.
Josh walks into the town square where they are setting up for the picnic basket auction. Betsy gives him a description of her basket so he knows which one to bid on.
Josh runs into Melissa as he's heading out to the auction, dressed like a local. She berates him for taking part in the auction.
Melissa comes down, dressed up, to observe the auction and spots Betsy flirting with Josh. She helps herself to the alcoholic punch in the "Gentlemen's" bowl despite being warned off.
Mayor Menlove conducts the auction while Melissa gets progressively drunker in the back.
When Betsy's basket comes up, the bidding is busy. Josh outbids the high bid of $2.25 with twenty dollars.
Melissa decides to auction herself off but that makes the townsfolk uneasy and no one wants to bid on her until Danny Bailey offers up two dollars, all the money he has in the world.
Melissa goes off with Danny while Betsy makes plans for her and Josh. Mildred Layton looks on and tells Rev. Layton she intends to get rid of Josh and Melissa.
Danny suggests Melissa win herself a teddy bear at one of the midway booths. He shows her how to hold the rifle but she's distracted by her attraction to him.
Danny kisses her and music starts. Melissa gets her own number, "Time to Enjoy the Ride"
Betsy takes Josh up to the local make-out spot, Virginity Ruins. Josh suspects she's a lot younger than he thought. She insists that she wants to wait to be married before getting intimate with a man to his relief.
Meanwhile, Danny and Melissa enter the Tunnel of Love ride together.
Betsy changes her mind and kisses Josh just as her father arrives with his shotgun.