Do you think if it were allowable for Amazon to do that, it would actually be profitable for them to do so?

As soon as any work became popular, anyone could undercut Amazon. If you really think that Amazon is in a position where they can charge significant money for something others can provide for much less, then you are talking about an anticompetitive monopoly.

If that's the case the problem is not with copyright, it's lack of competition. The situation we have now is just one where copyright means they can't publish just anything, but Amazon can always acquire the rights to something and apply those same resources to make it a best seller. They don't care if the book is great or not. They just want to be able to sell it. Being able to be the only producer of the thing incentives making the thing that they own popular, not the thing that is good. Having the option to pick what succeeds puts them in a dominant negotiating position so they can acquire rights cheaply.

I guess if that were the case though it would be easy to spot things that were popular when though they seemingly lack merit or any real reason other than a strong marketing department. It would really suck in that world. Not only would there be talented people making good works and earning little money, but most people would not even get to see what they had created. For many creatives, that would be the worst part of it.

Yes, Amazon would do that. Why would another person be able to meaningfully "undercut" Amazon here? Amazon would profit from selling e-books even if it's only for 10 cents - and integration with their Kindles and convenience of discovery would make it difficult for anyone to compete meaningfully on price.

For printed books, economies of scale work in their favor as well - if it costs them $1.20 to manufacture/store/ship a paperback, and me $1.50, how am I supposed to undercut them?