Profitability is relative, but the idea behind the low price is to encourage impulse purchases and to remove one of the incentives to pirate it instead. If you publish it yourself, all the profit is yours. If you have some publisher leeching from you then you would need to charge a lot more for your book just to earn the same amount.
It's also a competition thing. If you price yourself at the same level as established/well known writers, people will almost always choose them over you. People like familiarity, so they would be less likely to take a chance on an unknown.
But a lot depends on the size of your target market. The above works well for populist fiction, but if you have a very narrow audience who are under-served and desperate for new fiction you would get away with charging more.