Thanks for reading over the post, I know it was long.
I think that, as you say, the frequency of undercuts will, without doubt, decrease. And where the successful seller will keep their prices stable so long as they remain successful is without question accurate as well.
Now, my point here would be that though the undercuts would decrease in frequency, they would increase in severity to compensate. However, let's assume they don't and that we're successful in slowing the downward trend in prices. My question would be: Is that good? Now, good is often too subjective and to avoid confusion we can qualify who it is good for. If we want to be really extreme and focus specifically whether or not it is good for you, a producer in this case, we can narrow the question fairly well.
So the new question is:
Is your suggestion beneficial to you specifically or producers in general?
My answer would be no. By implementing this suggestion, specifically returning to the hidden prices, I would say you are actually working against your own interests.
Consumer vs Producer View
If you hold the idea that producers are separate from consumers, then you might think that your suggestion would help producers gain more of the consumers' wealth. By keeping prices higher, the producers would gain more gil and therefore become more capable of purchasing the things they need or want; albeit an arbitrary decision in favor of the producers.
My Argument
I personally reject the reasoning of the Consumer vs Producer view for two main reasons. First, arbitrary decisions in favor of one group or another are detrimental to the very foundation of a free market system. Secondly, I reject the idea of there even being two classes of Consumers and Producers separate from one another.
Most of this will likely sound familiar, but I can try to elaborate better. Now, I don't consider there being two classes in the economy. All consumers are producers, and all producers are consumers. In order to consume, you must produce. And you only produce so you can consume. Production is only a means to an end, and the end is consumption. So, when something is gained from the consumers in favor of the producers, an injury is done to the consumers; but, because the producer only produces to consume, the producer is injured as well.
Now, suppose you do not consume a thing, and you are a great productive force in the economy. Naturally, you would seek to maximize the value of your production, so you may think undercutting decreases that value. If you eliminate undercutting you believe you have gained some advantage or benefit. The problem is, while you gain now, your purpose in production is not solely for the accumulation of the gil; no, your purpose is to use that gil for some consumption for yourself. At that point in the future, all the gains from the higher prices will be matched in the higher prices of future consumption.
I'd like to add a little more to some other points, but not enough time at the moment, I'll make another point addressing other issues.
But really what I want to get at is... the idea of undercutting, which seems to be a focus for a lot of people. Many people dislike it, and no doubt it is annoying when you are undercut and your sales suffer. My main point that I'd like to get across is, undercutting is good for everyone; and, the faster those prices reach equilibrium, the better. I can back that up, but not enough time at the moment.