Re: How does this work?
Nice inquiry, @AC. This is the essence of the whole case and the concerns Steve Jobs was negotiating with the book publishers, as I've been able to understand after doing some online research.
Amazon had, just before the iPad was announced in January 2010, a ~90% ebook market share using the wholesale model...and the publishers were really steamed about it.
As you rightly point out, the publisher CEOs were horrified at having zero control over industry pricing as ebooks proliferated via Amazon (and their fear of paper books going the way of the Dodo bird). Bezos was in the catbird seat, because his vision of zero profit is supported by Wall Street, so he can drive down pricing to 1¢/unit profit (or, even negative) while the Amazon stock price still goes up (giving him huge cash reserves).
Note also, that while the publisher CEOs were freaked, so, too, were physical book store owners (not the warehouse book stores, the million family-owned corner bookstores throughout the US). They can't stay open if they have to meet Amazon ebook pricing.
So, now, here comes Apple with their iPad and iBook store (and Steve Jobs as white knight) by offering an agency model to the publishers to give them flexibility to price as they would like: market pricing...as opposed to zero-profit Amazon pricing.
I'm fascinated by anti-trust law after following the Microsoft trial and reading about the IBM mainframe consent decree and the AT&T breakup. How can Apple be accused of collusion when they had zero market share in 2010, while Amazon has a 90% monopoly?
My guess is that the Eliza Rivlin testimony will be revealing if there was some backroom dealing, but I'm not so sure.
Here's the email thread from Steve Jobs to James Murdoch that is quite informing.