An industry question.

You're talking about when books are marked down at a book store or other retail outlet, right?

The short answer: the retailer. They've spent money to acquire those books, usually at a discount anyway if they ordered in bulk, and they put them on sale when they have ascertained that the money they'll lose by not selling them full-price will be less than the money they'd lose by not freeing up the shelf space to sell something else at full price. Or, to be more accurate, when they've ascertained that they'll potentially make more profits by selling something else in that shelf space than they'll make by trying to sell your book at full price.

Retail balance sheets are almost a science in and of themselves.

The long answer: Everyone involved, to a greater or lesser degree. Happily, the author gets the lesser degree. When you, a published author, get your statement of earnings from your agent or publisher, you will see a column called "Reserve Against Returns." That's not returns from readers -- the retailer deals with those. Those are returns from the retailers, who, if they can't sell your slow-moving book at a discounted rate, will return the copies to the publisher (to be destroyed by the publisher) for part of their money back.

Every book deal includes some mathematical factoring for expected reserve against returns. In order to earn out your advance, you must achieve the expected number of sales and your returns from retailers can't exceed the reserve.

It's fairly complicated, so you probably shouldn't trouble yourself much about it beyond realizing that it's factored into your advance.

(I work in a book store currently.)

So many factors go into a book going on sale that there's no way of knowing who takes the hit. Very often, no one really does because the book has already sold a bazillion copies, and publisher and bookstores are just unloading the excess.

When a book truly flops, the publisher takes most of the loss. The writer loses because there will be no royalties, but there would have been none, anyway, simply because no one was buying the book.

With ordinary sales discounts, the retailer takes the "hit", but this does not mean there isn't still profit involved. Sometimes a lot of it. And at many types of outlets, placing big discounts on books everyone wants brings in customers who will buy other things. This is just good business. You discount something buyers want just to get them in the store.

But it is complicated, and not every discount or sale is done for the same reasons, at the same time in the book's life cycle, etc.

When books are sold on a "buy three for the price of two" offer, the publisher pays an upfront amount for the book to take part in that promotion.

Publishers also pay for their books to appear in chain book shops' charts and "best books of the year" promotions.

Old Hack said:

When books are sold on a "buy three for the price of two" offer, the publisher pays an upfront amount for the book to take part in that promotion.

Publishers also pay for their books to appear in chain book shops' charts and "best books of the year" promotions.

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Yes, but those are usually counted as business expenses, and the publisher doesn't lose money. The writer probably doesn't, either. Publishers also pay several other fees, and for other sorts of promotion in bookstores, etc.

Nah, nobody puts too much thought into retailer returns. It's built into the payscale, more or less.

Now, if your book really flops hard and there are way more returns than projected, then it could be difficult for you to sell your next book to a publisher.