Basically the escrow is the middle man that keeps both parties safe during the trade.
Say that User A wants to buy an item from User B, but neither want to send first for fear of the other not completing the deal. The escrow steps in and keeps both people safe during the trade. Here is how it works...
How escrow will help, if User A received the item but tells that he did not, and asks his money back?
Dealing with physical goods is tricky and most escrows won't deal with it as it involves the risk you mentioned and the solution for that is an escrow can lay out terms in which he will receive the goods first and then send it to buyer but that requires escrow to give out his personal info, such as name, address, telephone etc. and which is why most of the escrow refuse to deal with physical goods. As far as digital goods is concerned they can be tracked and buyer can't claim that he didn't receive the goods.