The relationship between price and quality is not only non-linear, it is often a curve with an inflection point. Most modern business practice involves locating that point, adjusting price and quality to where the profit is maximized, it's not an engineering tradoff, its strictly business.

Something very similar happens with the demand curve, if you make it cheap, you'll sell more, but you'll make less on each one. This is also a nonlinear relationship, and the role of the manager is to find the point where the area under the curve (total profit) is maximized. This calculation is relatively insensitive to what the competition is doing, since you can afford to lose sales to them as long as it means your total return on investments is better.

As scientific marketing techniques take over, and they are meshed with advertising control of markets, the classic equation of putting out a good product at a cheap price becomes meaningless.

I recall reading one article in a business magazine where a new Russian company hired American marketing specialists to advise them. The Russians guessed what the market would be, and set up a price that would pay their manufacturing costs and yield a profit margin they felt was appropriate. The Americans were aghast, they decided instead to study the market and then determine at what price and production levels the profit would be maximized, and then initiate an advertising campaign to generate that amount of sales AND NO MORE. Profit was no longer simply price minus cost, it was the individual profit times the total units sold, with that number adjusted to the inflection point of the demand curve. When the Russians countered "our competition will eat us alive with a cheaper product", the Americans responded with "we'll cross that bridge when we get to it."

That's the real reason prices drop drastically after a product has been on the market for a while. It's because the competition is gearing up, not because "they're working hard to bring prices down".