Firstly, Cheap, Standard, Premium and Prototype items are not supposed to be moddable; Custom items can be fully modified. However, I have been able to fully modify Artifact items. What is the difference if we can modify both Custom and Artifact gear?
Artifact usually comes decked out with full purple mods. Beyond that, no difference.
Secondly, how do augments work? I understand that you can only get them by crit-crafting gear. Now, what types of gear can be augmented? Only Custom? Can existing Custom gear be augmented?
Only crit crafted, doesn't have to be custom. You can get a crit craft of pretty much any item in the game, even green, even custom.
Doesn't all the other Custom gear become obsolete if only a few Custom items can be augmented? For instance, I have been using the Custom Lightsaber I created at Level 10. Now, there are Custom Lightsabers available on the GTN which have augment slots. Are these the best lightsabers one can get in the game? Since they have another slot and can be fully modded it seems not buying these if you have the credits would be foolish. Shouldn't the final goal be to get augmented gear with the best mods available?
If there was an infinite number of crit crafted armor? Sure. Getting crit crafted armor doesn't just require credits, though, it also has to be, well, crit crafted. There is only so much supply at any given moment, and besides that, not everyone will buy a custom piece just because it is crit crafted. People with the credits will want not only an augment slot, but the look they want. Some powergamers will go for function over form, but many people are much pickier than that.