Generally speaking I will just undercut back all the way to the point where I'm doing nothing more than breaking even.

In markets that I feel are mine I will undercut to the point that we are both losing money and will continue to do so til you concede defeat and bow out of even trying anymore.

This has worked for me so far although I pretty sure half the crafters on the server hate me. I've had a couple of tells asking me to stop selling things so low.