It's obviously cheaper to produce an extra copy of an MP3 than to manufacture a CD. And a CD is in most respects better than an MP3, since you can make MP3s out of CDs. And yet I just went over to Amazon.com to buy the new Shins album and I saw that they're pricing the MP3 as slightly more expensive than the CD.
This is, I'm guessing, a good example of a price discrimination tactic at work. Amazon accepts a lower margin on the CD option in order to create an opportunity to snatch up some highly price sensitive buyers.