The way I see it, it's just an extra field for those who want yet another way of organizing music. By default, your artists all go into the Artists and Album Artist fields. So when you create a Media View scheme for Artist/Album, or Album Artist/Album, you will get the exact same result. Ok.
Let's say you want to distinguish Various artists from artists. Well, you could change the Artist field to show Various Artists, but if you do that, then you lose the individual song's artist, right? If you clicked on "Sarah MacLaughlin" in the Artist tree, you wouldn't see that one song she has on a Variety CD because the artist field for that song would be called "Various Artists".
So...in comes Album Artist. It's an extra field that you can use to group Albums without touching the artist field. If you create a Media View scheme called Album Artist/Album, then you might see something like:
|PLS|Beatles
|PLS|Bob Dylan
-Various Artists
Sountrack to Reservoir Dogs
Sounds of the 70s
Jazz Hits
etc.