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?