What is the purpose of setup.py?

setup.py is used to create the release tarball.

From https://docs.python.org/2/install/index.html:

If you download a module source distribution, you can tell pretty quickly if it was packaged and distributed in the standard way, i.e. using the Distutils. First, the distribution’s name and version number will be featured prominently in the name of the downloaded archive, e.g. foo-1.0.tar.gz or widget-0.9.7.zip. Next, the archive will unpack into a similarly-named directory: foo-1.0 or widget-0.9.7. Additionally, the distribution will contain a setup script setup.py, and a file named README.txt or possibly just README, which should explain that building and installing the module distribution is a simple matter of running one command from a terminal:

python setup.py install