When I think of an auction, be it a charity auction or land auction or ebay auctions, first thing comes to my mind is the highest bid. If I really wants the goods being auctioned, the best will be the highest bid and I will have to beat the rest of bidders in their high bids.
But I learned today that at the AdWords auctions the system works a little differently. The winner only pays the minimum amount necessary to maintain their position on the page. That means you'll only pay the minimum necessary to beat the person below you. In fact, our quality-based pricing system ensures that you'll often pay less than your maximum bid.
So your prize of the Ad could easily be less than your highest bid!
Confused? Me too, until I watched this video. (Or watch in HD)
Google blog Introduction to the ad auction Also available at inside Adwords Blog