Why is the price of books set by the manufacturer rather than the distributor? For almost all manufactured goods which the manufacturer doesn't sell directly to the end consumer, the manufacturer sells to a distributor, and the distributor is then free to resell the good to the consumer at whatever price she wants (although of course if the distributor wants to stay in business, then the final price will be primarily set by market forces).

But the market for books is an exception: the manufacturer (i.e. the publisher) physically inscribes the sale price directly onto the manufactured good. The distributor (i.e. the physical or online bookstore) can offer a "discount" and sell it at a lower price than the prescribed one, but can't reasonably sell for a higher price for reasons of consumer psychology. I can't think of any other good which uses this strange business model. It seems to deprive the market of pricing flexibility to adapt to e.g. regional variations in demand, transportation costs, etc.

Of course, the market for books is very distinct from a standard market described in microeconomics textbooks, because so much of the value of the book comes from intellectual property rights rather than from physical resource and manufacturing labor costs, which makes it more like a monopoly than a competitive market. (Moreover, depending on how the author's compensation is structured, the publisher may face very high fixed costs.) But on the other hand, other markets like video rentals seem similar in that respect, but the movie studio doesn't set the sales price - the video distributor does, as in a standard market.

Why is the market for books so weird?
It’s the manufacturer’s suggested retail price (MSRP); manufacturers cannot dictate the final retail price. Any manufacturer that has a catalogue or a website has a suggested retail price.

If retailers want to sell at a higher price, they just slap a price sticker over the MSRP. From what I recall, this was standard practice back in the 1970s-1980s, when inflation was more of an issue.

The point of negotiation between publishers and distributors is the discount from the MSRP the distributor gets the books at. This discount is normally fixed for the entire line of books; they are not going to negotiate prices on a per-title basis. (Some best sellers might have special negotiations.) The retailer will then set prices relative to the discount received. Since the default is to sell at the MSRP, it can save booksellers the expense of putting on their own price stickers.

Why are books different? Well, go into a bookstore and count the number of unique products on 10 feet of floor space.

Other differences include:


Unsold books can be returned, which is unusual. This was a desperation measure that publishers resorted to in the Great Depression, which they never managed to undo. This means that most books have a limited shelf life, so inflation affecting the MSRP is less of an issue.
Books can be special ordered at book stores. The order price is going to have to be the MSRP.