Advertisement Quality on Google
The way Google ads are priced is based on this formula: (Competitor Ad Rank/Your Quality Score) + .01 = Actual Cost Per Click. The Competitor Ad Rank essentially refers to the bid one places to have their ad displayed and the quality score is the quality of the ad as judged by Google. This means that the higher the bid, the more the company would pay Google every time their ad is clicked on if it is displayed. This equation also shows that Google will lower the price if the quality of the ad is higher.
Why should Google care about the quality of the ads? Shouldn’t Google be ambivalent about the quality of the ads given that the companies are paying to have them displayed anyway. In one sense it seems like Google should charge more for higher quality ads, as people who make their ads with very high quality will have a higher value for the tops spots and bid more to have their ads displayed there, so Google could just gain a little extra money on top of the very high bids from the high quality ads. This, however, is not the case. In actuality, Google lowers the price for higher quality ads because Google is paid by the click of the ads. Naturally, ads with a higher quality will draw more clicks than those with lower quality. Google lowers the price for higher quality ads because Google is betting that the increased number of clicks on the higher quality ads will bring in more money than charging more for fewer clicks.
http://www.wordstream.com/google-ads