Using Unity 3.4.
In Physics Manager:
Rigidbodies of spheres with equal mass.
Scenario 1: Sphere falling on plane
Assign physical material with bounciness = 0, combine = average to sphere and plane. Everything works - the sphere falls and stops.
Scenario 2: Two colliding spheres with bounciness = 0
Assign physical material with friction = 0, bounciness = 0, combine = average to spheres and plane(no friction, no bounciness - just sliding without energy loss). Apply the force impulse to the first sphere - it moves with the velocity = 1. The spheres collide. The first sphere now pushes the second. Velocities of both spheres now equal to 0.5.
Scenario 3: Two colliding spheres with bounciness = 1
Set the bounciness to 1 for both spheres. Start the simulation and apply force impulse to first sphere - the first sphere moves with the velocity = 1. After collision the first sphere stops and the second sphere starts to move with the velocity = 1.
How physical material's bounciness affects the collision between spheres with rigidbodies(based on scenarios 2,3)?
Bounciness determines the ratio of transfer of momentum. Basically, it does what happens in the real world, basically:
0 = putty
1 = steel
When two lumps of putty collide, they coalesce and the combined body moves such as to conserve the momentum of the collision. Two lumps of the same mass traveling at the same speed towards each other (total momentum is 0) will collide and stop (total momentum is still 0).
For steel balls, consider a Newton's cradle. Again, momentum is conserved. Two steel spheres of the same mass traveling at the same speed towards each other (total momentum is 0) will collide and exchange their momentums, so bouncing back in opposite directions (total momentum is still 0).
In scenario 1, momentum is "conserved" because the plane is non-moving, effectively having infinite mass (and so undergoes infinitesimal ... zero ... acceleration).
You can maybe understand it better by reading some (real world) Physics textbooks.