I know it is frustrating, but hang in there - you'll find the right house at the right price eventually!
I am often surprised at how buyers refuse to make lower offers on a nice, none short sale/none REO homes but will dive in and overbid on a lower priced REO home and ended up paying more in the process.
So, perhaps it's not whether it's legal or ethical for agents to do that, but how realistic are buyers now a days and how they operate psychologically.
I do disagree with Chris on one thing (sorry, Chris) - many times the agent will say on the listing that the bank can refuse or accept any offer (which is true). So, even if there are five offers, the bank has it's own bottom line, they may or may not accept the offer even at listing.