I always undercut, because why wouldn't you? I want my item to sell so I can craft more and sell another item. The amount I undercut varies depending on the sale price of the item. Usually by around 100gil for items < 50k and more as the prices go up.
A reasonable undercut is just rewarding the person who pays attention to their sales, is online more, and keeps theirs at the lowest price. If folks only undercut by a little then everyone wins (the sellers.
I've never understood someone who undercuts by a large amount. For the stuff I sell, you aren't going to sell any faster, you just are going to make less. But if someone does I will either price it just below the major undercut, buy their item if is stupidly priced, or if the price has gotten to low, I leave mine at the higher price as it will sell.