Here's how I see it:
Apple is undercutting everyone on the premium tablet experience. The iPad is beautifully crafted with no corners cut.
Amazon is attempting to own the bottom-end market by using budget parts, cutting lots of corners, and likely by losing money on each tablet sold.
Both are valid. But to me, there really isn't a wide gap in pricing. We're already talking about non-essential purchases, and at $500 the iPad is aggressively priced for something dripping with quality and perfection. Use it side by side with any $800 or less full-on notebook, and the iPad feels like it should be twice the price. Is it worth $300 to go with a sub-par experience? Only if the additional $300 is completely out of reach for you.
I would venture a guess to say that the majority of tablet users are only surfing the web, checking e-mail, watching online videos, and playing angry birds. For the typical tablet user, this is a way to keep $300 in their savings account and still do everything they planned on doing on their tablets.