From the incredibly practical, consistently informative Joel Friedlander at The Book Designer:
It’s essential for self-publishers to come to grips with the way that discounts are handled in retail publishing. If you plan to publish a book that will be sold within the retail book distribution system you’ll need to understand how discounts work. Even if you plan to sell your books through online retailers, you’ll still need to set a discount.
But before we get into discounts themselves, let’s back up a moment.
The Purpose of Discounts
It would be impractical for manufacturers of products to be the only source for the average person to buy those products. So we have a multi-tiered manufacturing and distribution system. Manufacturers set the price they think the product should sell for, then offer it at a discount to retailers willing to sell to their own universe of buyers.
Manufacturers can make these arrangements with hundreds or thousands of retailers, trading the discount to acquire a means for their customers to easily buy their products.
But even this isn’t efficient enough.