Yes, we hate value engineering because of this bifurcation (it's real, and I've been whining about it for a while too). But I see it somewhat differently than you described:
> value-engineered wares for people who don’t care
You say it like there is a choice involved here. There isn't. This is something that needs repeating - customers choose out of what's available on the market, not out of the space of all possible products. So all products that are hard to make and sell yourself are primarily vendor-driven.
If a market bifurcates like this, I can't announce my preference for the missing middle at all. The split may have happened against my preferences, or it may have happened before I cared, or it may have happened before I was even in the market for that product category. But once it happened, people who'd prefer something better than barely-fit-for-purpose can't get it.
> high-quality end becomes higher quality and three times the price it used to be
If it becomes higher quality. As you mentioned higher up, it frequently becomes different, as it's no longer targeting a large audience.
> The choices of other customers deny you the continued availability
Yes, but again, what choices? These things stick in a feedback loop, a self-fulfilling prophecy. And it doesn't take people choosing the lower-tier option. It takes a company choosing a somewhat lower quality this year than they did the last year, because if done gradually people won't be able to quickly tell (the very job of marketing is to confuse customers about this).
I hate "revealed preferences", I consider them mostly bullshit given the lack of actual choice - but if we want to frame the situation like this: the bifurcation doesn't require that most of the middle-tier consumers "actually prefer" the cheaper option over the middle one. A company will attempt this even if it meant losing middle-tier customers altogether, as long as they believe the expanding lower-tier customer base will make up for it.
What's even more maddening is the interplay with economies of scale - the middle-tier product could've gotten better and cheaper over time, if its broad customer base wasn't stolen by the low-quality option. So the households that couldn't afford the quality option yesterday, would be able to afford it tomorrow - and today would be making use of used ones, because there is such a thing as a market for used goods, which works best when items are durable. But companies often do try to sabotage it, too.
Also: the downwards quality spiral doesn't stop at a reasonable point, it stops at the lowest point where the customers can be duped en-masse, unless stopped by regulatory means either. I'll happily argue that, for most products, the lowest-priced options shouldn't exist in the first place, because they deliver negative value (after accounting for total use costs, with possible future replacement, which most people don't) and endless frustration. I see them as an environmental disaster.