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I think of Amazon's setup as accounts and ebooks (files).
Your account lives on Amazon's servers, and it knows what ebook titles you own and what devices they are authorized on and which actually have copies of each ebook. If you ask for a new download, the server takes its master copy of that ebook and encrypts it for exactly the device/app+device you own (e.g. based on serial numbers, etcetera). So the files are locked to a single device, but your account allows (typically) 6 devices to have their own copies of each ebook.
This is why existing ebooks (files) still work when you switch accounts at Amazon. All new downloads will be from the new account and you can't get to the old account's ebooks (at Amazon). However, the ebook files from the old account still work because the device does not "know" about your account - it just knows how to decrypt ebooks when they are targeted uniquely to its serial number (or whatever the unique device id is).
An interesting end case is what happens if you have the same ebook in two accounts. Would the ebook file be identical if it was downloaded to the same device from the two accounts? From a DRM point of view, the original encryption (e.g. used on the Kindle 1) definitely was identical. I don't know if this is still the case with the latest Kindle 3 (and K4PC) encryption, but remember that a Kindle 3 can still read ebooks from old accounts. So it can't be very different.
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