I think people really need to learn the difference between "undercutting" 1 gil and "undercutting" 400 gils.
In the first case you are not "undercutting". You are placing yourself at the top of the to be bought list. Everyone does that, and if you don't you are wrong. It is just the nature of the beast and nobody should feel the least bad about it.
In the second case you ARE undercutting and you ARE the problem. Why do you lower your price this much ? Let's say you are player A and competing to sell with player B. After you have put your stuff 1 gil lower than B, B come, see that, lower its price to be under you. After you have put your stuff 400 gil lower than B, B come, see that, lower its price to be under you. You win nothing by cutting 400 gils. Moreover, if you do sell before B come, that is 399 less gils in your pocket.
But the biggest problem is yet to come, it is the psychological effect you have on your corner of the market doing this. When you lower by 1 gil, you are "playing fair" and you encourage other to play fair. When you lower 400 gils on a 3200 item, you are basically making a statement of war to other sellers. You are putting your nuts on the table, and saying "get the f** out kid, i'm the one in charge there, and i will drive you out of this market".
Guess what. Most people when provoked this way won't play nice. They won't undercut you by 1 gil, they will do so by 200 or 300 gil, because f** you. And when player C come... well, you described yourself how quick this can degenerate. At some point nobody has anything to win anymore, everyone lose, and hopefully the market reset itself to more appropriate levels.
Anyway, OP. From what you described, you are not a victim here, you are one of the bad guys.