Solution 1:
I feel like I'm missing something subtle or important (encountering this page years after the question was asked and not finding a satisfying answer) however the following works fine for me:
python setup.py install --single-version-externally-managed --root=/
Compressed *.egg files are an invention of setuptools (I'm not a big fan of them although I understand why they were created) and because the setup.py script is using (and may require) setuptools, the package ends up being installed as a compressed *.egg file.
Solution 2:
The command line options above are similar to those used by pip (the Python package manager) which hints at another way to stop a package from being installed as a compressed *.egg file: Just use pip! If you have a directory containing a setup.py script you can run the following command in that directory to install the package using pip:
pip install .
This is an improvement over the setup.py command above because it tracks additional metadata (e.g. tracking of installed files allows for more reliable removal).