I've had a seller charge me for Priority USPS for a $2.50 POSTCARD. Well, I knew they would because they posted that in the description, and I really wanted the particular card, so I bought it anyway, and then sent a gentle suggestion to seller that I'd be glad to settle for regular mail, pointing out that her shipping cost was considerably higher than typical of sellers in that item category. The response was, "Oh gee whiz I just don't feel safe mailing my precious things by regular mail." Uh-huh. So I paid, but will not buy from that seller again.
Just be reasonable. Shipping should be shipping, at a rational percentage cost in relation to the value, size and weight of the item. When S/H starts to get up to 40-50% of the final price of the item, it's time to rethink. Cause I will certainly be thinking of it, as a bidder.
I guess in summary, I'd say that for items I know should be boxed and well-packed, and cost $25+, Priority makes sense. For small items of lesser value that can be mailed in an envelope with a little cardboard or plastic for protection, Priority at $3.50 feels like a rip-off.
Obviously any item of high value should be insured regardless, but that's another issue.
Steve's suggestion of offering a choice is excellent. As a bidder, I DO keep track of which sellers give me the best options and service, and avoid those who don't.