If Lego's products are better, they'll win on quality and be worth the price. Or perhaps the general public doesn't value the difference, in which case the public gets what it wants. This is capitalism working well: competition, with competitors competing on quality and price and consumers having options.
First of all, you did not consider the fact that the general public is often unaware of the quality difference; what the general public sees is (1) the price, (2) the ads saying that (in this case) "our bricks are just like Lego, just cheaper"; any serious thoughts about quality usually come several years later (and it's usually way too late for the original company which is floating belly up by that time). In general, it's naive to think that competitors really compete on the quality plane.
Lego is a perfect example of this; actually, given the current price of these toys, it's a low hanging fruit every toy producer in the world is or has been thinking of.
And, don't get me wrong: I think Lego (the company behind it) deserves a good ass-kicking, if not for the exorbitant prices (that I doubt is only high enough to make up for the high quality), then at least for the dumb marketing practices (who the fsck needs Star Wars sets with only a handful of bricks, most of them custom at that? where are the generic bricks?).
I am just pointing out that it has nothing to do with "beneficial" effects of capitalism.
And, Lego is unlikely to survive it, at least as we know it today.