Without knowing "how much" over actual shipping it is hard for me to say if this is fee avoidance. I can tell you that you will offend alot of HONEST sellers with your post. I see you have only been around a few months so I will let you slide.
First of all you are by no means supposed to work your packaging costs into your starting price, though you are to include your Insertion Fee, projected FVF and Paypal fee's. As far as the low starting prices that is an EBAY SUGGESTED selling practice. They feel that a low starting price generates more interest which leads to more bids, people always want what someone else is bidding on!
I would estimate that 90% of sellers charge some sort of handling fee, that is business plain and simple. The same way you pay more to have a pizza delivered than if you had picked it up yourself.
I am a VERY honest seller my userID is moonshadow1313 if you want to check my feedback so good that I have OVER 40% repeat business!! I get approx. $1.00 for packaging and depending on the item that has to cover plastic sleeves or bags, cardboard, bubble wrap, Press n' Seal, envelopes, boxes, trip to Post office, but most of all for my time. Alot of work goes into selling (photos,listing,inventory,etc,etc,etc) and I don't think it is asking too much to want to get a few cents per transaction to pay yourself, especially to those trying to make this a full time gig.
Now I'm not saying that there aren't plenty of scammers out there taking advantage but you need to be very careful what you say especially in your listings. You would basically be telling your customers that anyone who charges you a packaging fee is dishonest and ripping you off and THAT is dishonest. You still charge it, you just put it in your start price where as they put it in their shipping. And yes it should be fair charging someone $20 to ship something that costs $5 is ridiculous.
If I were you I would avoid putting any of that in your listing. You could just simply say "Lowest shipping prices on ebay, Shop around and see" and if your competition is charging outrageous shipping your listings should speak for themselves. I'm not sure why your sales dropped so drastically, after christmas is actually a really busy time. People didn't get what they wanted and have money. You might try branching out and selling different things. You wouldn't believe the mish-mash of stuff I sell. If you can afford to drop your start price you would be surprised how well it works.
TO CAKES: by not pointing out your competitions faults you are not only taking the high road (good for you) but you also saved yourself from getting kicked of ebay! It's called bid interferance and a VERY BIG no,no!!
Sorry I know a bit long winded but I hate it when people give me short answers and don't explain their reasons. Good luck