Amazon doesn't make that Kindle $20 cheaper, it makes the ad-free version $20 more expensive, or at least, that's how I see it. That's more about market segmentation than the actual value of ads.

Even if we assume ads are nothing more than an annoyance with $0 value, the "with ads" version may still be beneficial to Amazon. That's if people with a lower budget tolerate ads and those with a high budget don't. If they only sell the expensive ad-free version, they will lose the low-budget customers, if they sell the ad-free version at the with-ads price, they lose money from people who are ready to pay more. Ads here are just a market segmentation tool. Just like it is common for low end products to be the same as their high counterparts but with disabled features.