I'll write an article on the economics in this.
But it boils down to this:
Let's say you need your game to make $2 million to break even.
When you sell a copy at retail, you get $15. When you get it direct you get $45.
However, most people want to buy at retail. To be available at retail you have to sell X units per store each week. If you don't seel that number, they take you off the shelves and then you sell 0.
Therefore, you need to make sure that you can sell X units at each store each week and to do that you can't undercut them or else you may not be able to quite reach that X units per store but you will still have the 70% of the public who will simply not purchase electronically.
If GalCiv II were only available electronically, we could probably sell 30,000 copies in the first year (maybe more but in this ballpark). Having it at retail at a lower price will probably mean 100,000 units at retail and still 20,000 copies direct. Those 10,000 people who didn't buy it direct are likely enough in those first few months to ensure that it stays on the shelves longer which is what it's all about.
Bottom line: Game sales is about this: How many units can you have on a store shelf X how long you can keep it on the shelves.