If the product and price are reasonable, he should stick to his original pricing. People who need the service will come around as long as it is not terribly expensive, and you avoid perception problems if you change your price wildly.
The reason to be concerned about the competitor offering a cheaper product is if: (1) it will turn into a better product, or (2) it works differently enough to make your business model or product obsolete. Unless either of those conditions are met, this guy should focus on growing his own business rather than trying to crush someone else.
This seems like a low-end disruptive innovation. Neither 1 or 2 have to be true for the upstart to become a problem. I don't advocate over-allocating resources towards a competitor who may or may not be a threat. But submitter is already losing business. It may be time to be aggressive.
The reason to be concerned about the competitor offering a cheaper product is if: (1) it will turn into a better product, or (2) it works differently enough to make your business model or product obsolete. Unless either of those conditions are met, this guy should focus on growing his own business rather than trying to crush someone else.