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The agency model means that the online retailer isn't the owner/seller of the book and, as an agent, gets a fixed percentage to sell at a price set by the actual seller - the publisher.
With paper books, the retailer either buys the books on firm sale or SoR (Sale or Return) at a discounted price... they then actually own the books (well when they pay the invoice technically) and can decide what price they sell at and which titles get discounted heavily (also depending on how much they wish to compete)... the level of discount from the publisher is higher for firm sale and also affected by quantity which is why the big boys get a bigger cut than the independents.
Hopefully this may change in the future to allow easier discounting on eBooks for the retailer and more competition but, from a retail point of view, it has advantages for the retailer in that they know what they're going to get for every title and don't have to worry about price matching to compete with someone else using a title as a loss leader. It also allows better forward planning for a business to survive...
One of the reasons that so many independents have gone under, is so much heavy discounting... very nice for the customer (but a reduction in choice resulting from loss of outlets) but resulting in insane activities. When I ran a specialist SF&F bookshop, we should have had excellent sales from the Harry Potter books but with the supermarkets selling them as loss leaders at a lower price than we could buy from the publisher, they were basically a waste of time... with the fourth title, we didn't even order from the publisher just went round to Tescos and bought half a dozen for half the price we'd have paid the publisher... still didn't sell as we had to then add a small profit resulting in the copies we had going to regular customers who were collectors of 1st editions in the US. Even the majors were lucky if they did better than break even due to the loss leader activities of supermarkets. The only people who made any real money, from Harry Potter books, were the publishers and the author. Fine for them but tough on book retailers and nice for customers but they're the ones who bemoan lack of choice!
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