Some keywords have so many competitors bidding on ads, that the list of sponsored links is pages and pages long. Doesn't everyone, who ranks less than 5th, know that their ads will never be seen and they're just wasting money? or am i missing something?
They only waste money if a click goes through a link and doesn't convert. So there is no actual waste of money even if you are 15th, you just won't get the traffic you may want. When people put 700+ keywords associated their Ad, and they bid super-low ($0.05-$0.10/click), even if they are 15th in the ranking on all of their keywords the amount of traffic coming in will add up if they get a click here and a click there per keyword. It's all about how much you're willing to pay per conversion. Ad traffic and ad rankings are overrated. What really matters is profit and ROI.
Another point to mention is that advertising in the lower ranks can sometimes mean a higher conversion rate. If you rank number 1 you are likely to recieve a good number of impulse clickers... you know, the kind of people who ALWAYS click number 1, because it's usually the best website for their query. But what you need to ask yourself is - would a searcher who is trawling through pages of results be more likely to buy than someone who just clicks the first result. The people who look through pages of search results are those who are having a difficult time finding what they are looking for. If you can offer it to them straight up in slot 15, then you have a high chance of making the sale because the buyer knows that he/she cannot find the product you are offering anywhere else.
ranking on a secondary page has a whole other strategy to it. Usually you will find search portals such as shopping.com on there. Reason being they have, lets say 1 million products, and if they advertise for all 1 million of them, they cannot afford to be very aggressive, however if someone does go to the second search page, clicks their ad and purchases a product their ROI is going to be extreme. The point is massive keywords that get maybe 1 click here and there for their entire portal database equals massive traffic for very cheap.