As someone who works in both product marketing and marketing in general, I think your observations are spot on. From a pure 'value proposition' point of view, to outsell a crowded market, you have to offer something that no one else is able to offer - what we call a compelling event. As such things are rare, price becomes the next battleground.
I agree we're probably getting into the end game of your stage 2 above, which will mean a few will continue to offer silly priced goods, and most will drop back in order to sustain some level of sufficient sales to recoup investment costs.
What also surprises me, is the number of times I read a review on here about HP's or IEMs that states they are punching way above their price bracket. I do feel that such a state is now the new normal and that we're actually seeing the beginnings of the point where quality is more commoditised, and accessible to those with slimmer wallets.