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Amazon is right; it's up to the seller to determine the price of anything they sell. Various factors may modify the price, but it's ultimately up to the seller.
So if the question's "Can Amazon charge more for the Kindle Edition than the paperback?" the answer is yes. If it's "Should Amazon charge more for the Kindle Edition than the paperback?" then most consumers would argue the answer should be no.
I believe the appropriate price for an e-book should be somewhat lower than that of the currently available paper edition. They should cost more while the book is in hardcover than when it's in paperback because certain costs are higher. For example authors make more in royalties on hardcovers (it's a larger percentage of a higher price) so e-Book prices should reflect that while the hardcover is on sale.
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