[bob1029]

You're right - in pure information theoretic terms there is nothing special happening here. It's a tradeoff like always. But, in human perceptual terms (i.e. how JPEG/MPEG are designed), you may find substantial gain in useful information per bit by applying dithering.

The useful amount of information represented by any given bit of data is much larger in this arrangement. 1 bit = 1 entire pixel. In other schemes, you have upwards of 24 bits representing the contents of 1 pixel. To human eyes, only 8 of these bits really matter. You can usually throw away 50% of the other 16 without anyone noticing.