I agree that contests such as the one Lays runs are a marketing and money saving tool. They entice people with a prize that costs them far less than the research and development would. In a way it is brilliant. Have the general public do your work and sit back and reap the rewards.
Why pay someone to come up with ideas when you can rip off your customers ideas. Of course these promotions are ways for the company to save money. Obviously the average consumer is going to think outside the box more than a paid professional who probably isn't cable of thinking outside of the box any more.
Contests are out there to make money for the company. The research and development phase has already been passed once the products are already developed. The contest is smart because it helps the company's image by getting it out there. In addition, they can get feedback on how successful a product might be down the line.
I don't think the Lays Flavor contest is a way to avoid spending money on research and development. Most of the cost in developing a new flavor is in creating the actual taste, mixing all the chemicals etc. Coming up with the name of the flavour itself is relatively easy. I think the contest is mainly a way to get people thinking about Lays chips, and buy more product.