Race to the bottom affected the PC market. Look at how Dell, HP, and others are doing.
Yes, there is a large number of consumers that are very price sensitive. When they get subsidized devices (like the Kindle with ads), some portion of that group complains about the ads.
The best thing that could happen is for people to become more educated about the tradeoffs and make decisions accordingly.
There's nothing wrong with this situation but as has happened with the PCs, consumers will probably see that there's no use sustaining prices that are high forever and when there's demand there will be supply. And boom, your will probably have a new race to the bottom.
Unfortunately, there is a segment of the second group that buy cheap and then expect more. Eventually, devices will catch up to meet even the needs of those likely to complain at the lower price point.