Extreme Undercutting - Should it be a violation?

[Nixxe]

I'd imagine nothing would sell, more people would be willing to make stuff themselves, and sellers (at least those with enough sense) would lower their prices to the point that others would be willing to pay.

It would probably actually lower the supply and raise prices, especially as people grow increasingly frustrated with the seller-side of things and stop participating. Undercutting is essentially the vehicle through which competition lowers prices, so if you take that away, don't expect prices to go down.