UTMC

Correct me if I'm wrong about this, but here's the story...

I'm trying to find myself a helmet light to use for nighttime rides on my dirtbike.
I found one on ebay that I wanted and put in a bid. It's a no reserve auction, and I was the second bidder.

When I got the email confirmation, the item was also listed as having a "buy it now" price, which was actually still a pretty good deal for the item, and I would have gladly snatched it up for that price. Returning to the auction page, "buy it now" is nowhere to be seen.
Well, as it turns out (and I think this might be for no reserve auctions only, or if your reserve price gets met) if someone puts in a bid on the item, the buy it now option disappears.

That means that some lowballer can come in and throw a hail mary bid for chump change, and knock the reasonable deal off the table for everyone else. So instead of both interested parties paying/receiving a totally fair asking price, the buyer (me) has to sit around, waiting to see if he gets sniped at the last second, and the seller stands to lose a somewhat substantial amount of money on the deal.

Is this actually the way it works, or is there a failure on the part of the seller to correctly set up his auction?

Because that seems dumb to me. A buyer and a seller should have the right to choose whatever level of risk they'd like to engage in during a transaction.
The whole thing seems le dumb.

It's the way it works with ebay over here.
The buyer and the seller may have the right to choose their risk, BUT that's the point.
You compete with the other bidders for the item. That's the whole point of ebay. Anytime you make a bid, you run the danger that someone may outbid you. Buy it now gives you the option of eliminating that risk but at a price.
If the buy it now option would remain after a bid has been made, the initial bidder would be locked out from proceedings - not because he has been outbid. Which would be unfair to him. Keep in mind, the other bidder will, at some point, inevitably, be YOU. He/you can always choose to go higher before the auction ends, and the auctioneer can set a reserve if he wants a minimum amount but not demand a high starting bid.
The point of the auctioneering principle is finding the best price for all parties concerned which the market agrees on.
Leaving buy it now in after bids had been made would give the auctioneer an unfair advantage over the bidders.
Ebay would also just stop working. If it remained, sniping would get crazy, and I don't just mean crazy like wild and mean but crazy like unpredictable.
Also, you wouldn't put in your bid and wait and see. You'd bis, but not ever bid more than buy it now, no matter how good the deal, and then you'd wait to see if the price climbs towards buy it now. If it doesn't, you'd take a chance and risk loosing or making a true bargain. If it does, you just hit it. Since other's will work like this also, the auction-time would become a fiction. An auction that lasts seven days, giving you that long to decide what it's worth? With buy it now overriding bidding after bidding has begun, that'll be a precious memory. You'd be under greater pressure to make your decision. The entire bidding process, as fucked up as it already is, would just stop working. Sellers could no longer expect to get a penny more than the buy it now price, which is the entire rationale behind using ebay rather than craigslist (getting the best price for BOTH parties), they'd only ever get the buy it now price. So many sellers, especially private sellers who care about the price of individual sales more than commercial users, would either stop using but it now altogether or set the price quite high and it would rarely be reached. It would be superfluous, leaving it in would make it die out and actually reduce how much choice both buyers and sellers have in their risk. And even in auctions where it would still be used, you, the buyer, would have less choice as it would reduce the price-range that may be achieved while, at the same time, giving you less time to make your decision.
You and the seller can, in fact, agree on a fair deal, but if a third party gets involved by making a bid, you have to respect their rights also. They made a different choice than you did, bidding instead of pondering to buy it now, but they are entitled to their right to chose just as much as you are.

I haven't used ebay in ages, but when I did, I soon stopped bidding way before auction ending. I want to achieve the best price for me AND get the item, this only works reliably with sniping. On items where the option was available and the price wasn't a big issue, I'd just compare the price to Amazon and the like and use buy it now. No hassle, no suspense, just a done deal.

Also, you're complaining on an internet forum about loosing an ebay auction. That's like sooo 1999. That light wasn't a precious artwork or rare antique. They made more than one - and someone else makes a competing product. You'll find another one, elsewhere, maybe more expensive, maybe even cheaper. I once thought I was clever by buying a DVD on ebay. After they hadn't delivered after several weeks and could only come up with weak excuses and the bad seller rating had ensued, only then did I look at Amazon. There, I found the DVD. Slightly more expensive (but seriously, only slightly, like the value of a candy bar more expensive including shipping and handling), but Amazon actually delivers (except that one time I ordered a book from a marketplace vendor and it went from Britain through Norway and Denmark before arriving at my door a month later). Back on the DVD, Amazon and I agreed on a fair price for the DVD, well, in as much as you can "agree" to anything apart from doing it nor not in the marketplace, I got what I wanted and didn't have to worry about silly seller antics. I also avoid marketplace after that thing with the book, I may dislike their politics but every other business I ever did with Amazon has been a pleasure.