Before I had the Domino, all my bookshelves were made with biscuits. And they're holding up just fine (with plenty of books, even).
If I were to use the Domino in this application, I'd use it exactly like I did the biscuit joiner. On the shelf ends I'd use the "tightest" horizontal setting for one domino (probably pin-registered off the front) looser settings for all others. I wouldn't dado. If I did dado, I wouldn't also do the domino.
I too would set the inside of the shelves in from the front of the bookcase or put a faceframe on the outer edges. And I'd assemble and attach that frace frame with--you guessed it--Dominos.
Here are some bookshelves I made about 8 years ago. Birch ply and cherry and slate.
They were made for a long wall, then we moved, and I separated the three shelf units (and haven't yet found the time to cut the slate tile on the rightmost unit...or hang artwork above the shelves. Man, I'm slow.).
You can see the inset shelves if you look closely at the verticals. See how they throw a shadow on the corner? Those help a lot, not just to hide production errors, as Michael suggests, but to break up the monotony of a single-plane grid, which is what would happen if all the shelves were flush.
I've got several units in this "style" throughout the house--all biscuits, all just fine. Dominos would be much easier, I would think, as there's far less vertical play in a Domino slot than there is in a biscuit slot.