Note the article is from the trailing edge, and the other 8-bit systems pretty much almost dead at that point, and the C64 was just barely still selling for another year or so on cheap fumes.
(Never was even aware of C128, so no comment on that.)
Commodore didn't have the money to sell the C64 below cost. I don't think there's any evidence to suggest they did other than possibly for very short periods. People thought they did at the time, sure, but Commodore's ability to cost-cut was in large part due to their extreme vertical integration at the time.
In 1988 the C64 was still selling over a million units a year. It was losing market share fast, but due to the growth of the overall market, not due to dropping C64 sales - sales at that point were still stable. The NES sold ~7-8m in 1988.
Yeah, maybe it remained the "pirate's choice" in certain circles, as a lot of the adverts there were for copy carts etc.
Commodore seems to have really believed obsolescence wasn't real. WDC launched the 65CE02 in 01988, and Commodore tried to build the Commodore 65 on it in 01991.
A decision I've never understood from that period: IBM introduced the PS/2 Model 30, with an 8-MHz 8086, in 01987. The 8086 was from 01976, but at least it had a 16-bit data bus, and at 8 MHz it was over a MIPS (though only 0.4 Dhrystone MIPS if we believe http://www.netlib.org/performance/html/dhrystone.data.col1.h..., that's still 8 times the Cromemco Z2 with its Z80, and 20 times the C64, though at this point we're well outside the area where Dhrystone is a good measure). They did replace it with the "PS/2 Model 30 286" the next year, but unfortunately not before my school district got suckered into buying some of the crippled beasts.
I agree that the C64 was pretty similar to the Atari 800, but it had much better sound, it had 256 multicolor sprites instead of 8 two-color sprites, and the 800 shipped with 8K and couldn't hold more than 48K. So there was a pretty big difference in what you could do on an Atari and what you could do on a C64.
My school had a number of 8086-based PS/2 Model 25's. By the time I used them in 1991, they had been retired to second-tier labs, but they were still perfectly usable for checking email, word processing, telnet to the UNIX server, and some light games. (I remember Star Control ran particularly well on its quasi-VGA "MCGA" graphics.)
These particular PS/2 Model 25's probably had an edge on the C64, though. Having proper Ethernet cards and access to Netware servers allowed loading applications a lot faster than, say, a 1541 disk drive. Although my present-day C64 with Ethernet adapter, SD2IEC, etc., might could give it a run for its money. :)