I've seen the "too low" effect discussed elsewhere, it does seem to be real for some people (including some who are fine 'buying' free books). I would expect it more with unknown authors, however, where it looks more like "I'm desperate to get anyone to buy my book!" than with an author of established quality (although I suppose no matter how "well known" an author is in their own genre there will still be a lot of people who don't know them, I'm sure there are hundreds of 'good' authors I've never read).

Pricing is, I think, a matter of guesswork and experiment. But if you both sell more copies and get more for each one that has to be a win...