I appologize, as I didn't have time to read every bit of the post here (company coming!;)....but I just want you to know that this drives me nuts, too!!!!
And, even though some of the cheaper shops will probably go out of business (or they are only doing it for love, zero payment for their time), there will always be new shops, that open up, and do the same thing....It really isn't fair....
HOWEVER...I agree with Crochetgal....you have to find the right market, and you can make it work. I always had the motto that if I am going to give it away, it will be to family and friends, who would love to have my stuff!
Then, you start to wonder, am I out of line, for charging so much? The answer is no.....is the other person willing to expend the extra energy to reach the right crowd? To promote? It's frustrating, to have to do this, but it's a fact of life, here on the internet. You will get lost, unless you make yourself noticed. But as time goes by, you become more established, and don't have to work so hard...people start coming to you, more. My advice is to hang in there, charge your price, and work on promoting.
Also, another thing that I have taken to doing, is actually including the cost of materials, in the listing, and/or time spent! (I just got fed up with people saying, "That yarn is how much???" "Or, I can get a hat like that, for way cheaper!" Once you mention your time, to most people, they respect that, when they stop to think about how much they work for.:) Good luck!