The idea was to allow landing surfaces like in a Battlestar, so you don't bounce off the ship, but instead slide along the surface. Bounce is an intentional, previously hardcoded effect. I know Diaspora wanted it so I'll try to get some docs to the Wiki for it from them.
Here's what I can infer from the code.
All four values below Collision physics accept floats. Both bounce and both_small_bounce have a retail default of 5.0. Friction is 0.0. rotation factor is 0.2.
Upon collision, if both colliding ships are small, and one is a player ship, both_small_bounce is the factor used.
If both ships are small and neither is the player, there does not seem to be a bounce at all.
If one ship is large, the regular bounce factor is used.
I can't really explain what friction or rotation factor do, and apparently Sushi didn't understand the rotation factor based on his comments, he merely exposed the value to the modder to experiment with. I believe friction will somehow slow your movement as you'd expect when there is no bounce, and you are instead gliding along the surface of the ship.
Also, $Collision Physics: itself takes no arguments, just the presence of one or more of the flags below it.
