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As far as the Kindle goes, Collections are a way to group your books together so that you can view the group names on the Kindle to make looking for a book easier - kind of like tags in Calibre but Collections is the term Kindle uses.
I don't know if other ereaders use them as I only have a Kindle - but they probably use folders or a similar term. Calibre seems to know about collections as it can display most of them for a Kindle, but it can't create them for the Kindle by default. I got the impression it can setup collections for other devices that are more standard, but I'm not certain.
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