Supply and demand, if the item is selling at your price quite often then an undercut by more than 1% is stupid, if it is a slow moving item, i.e. thavnairian onion this item will drop in price gradually as supply increases due to being a low demand at that price and a high supply.
What I do when people undercut my stuff that I know will sell quickly is buy it and resell it at a higher price, usually if the item is at 60% of my price. I.e. HQ Volcanic Rock Salt, I sell it for 3k but people undercut it down to 1.5k, I buy theirs and resell it at 3k, that's about 1,5k profit - taxes or barely any time spent.