In the long run this isn't good for customers because it de-incentivises innovation. Why should I develop a new product when amazon can make a ripoff and use their scale to undercut me?
It de-incentivises innovation that isn't worthy of a patent. Patents (ostensibly, in their original intent) exist in part to allow innovators to know that a competitor can't just go off and clone what they did, but has to license from them or counter-innovate a novel alternative.
In practice this won't stop all possible competitors, specifically those that flaunt patent law, but I don't think Amazon is one of those. Amazon could likely buy a license to the innovation from the patent holder for less than dealing with the courts would cost, in which case the patent system would be working as intended.
Amazon can undercut you whether you sell on their website or not. So can any other major corporation if your product catches their eye. Lastly this particular product was on Amazon for a decade (per article) before Amazon choose to complete. And the answer to your question is develop something you can patent or can compete in other ways that scale and price.
If you sell on Amazon's site, then they know your sales numbers. This is a specific advantage of their position as a distributor.
I run a little side-business, making a hardware gadget. My sales volume data is a sort of first-mover advantage. To compete with me, you have to risk guessing wrong about how many potential customers are out there.
> Why should I develop a new product when amazon can make a ripoff and use their scale to undercut me?
This is what patents are supposed to be used for. You create a truly innovative idea and receive a patent for it. Then some large manufacturer, that has the scale to produce your product far more efficiently than you ever could individually, contacts you asking to license your idea. Together you work out a fair price for the rights, you get money for your invention, they get profit, you both leave happy, and the customer gets the best of both worlds.
