What is the ad auction?
You would go to market and see the auction of clothes. Like this, advertiser bid on ads through google adword for adsense ads. This is also called ad auction of Google ads.
Simply, more advertisers will be interested for getting your website space, means more competition and you will get more earning in this auction system.
Why does AdSense use an ad auction to determine the ads that appear on my pages?
Because, it is the only best way to sell ads at higher price and provide higher return for giving ad space by website.
How does the ad auction work?
ad auction works on the basis of quality score and bid.
Quality Score represents an ad's expected user value and performance on a particular site. It's made up of three components:
•The ad's past performance on your site and similar sites
•Relevance factors, such as relevance of the advertiser's ads and keywords to your site
•The advertisers' landing page quality
Our system is designed so that advertisers with lower quality scores will need to bid more to successfully compete with ads that have higher quality scores. To more plainly demonstrate why this is, let's look at how Quality Score impacts how ads are ranked. For AdSense sites, Ad Rank is calculated by multiplying the advertiser's maximum bid by the Quality Score:
Ad Rank = MaxCPC(an advertiser's maximum bid) x Quality Score
Once we have the Quality Score and Ad Rank for each advertiser competing in the auction, we can determine how much each advertiser will pay. It's important to remember that an advertiser's maximum bid isn't necessarily how much they're charged; they only need to pay enough to beat the advertiser below them, based on their bid and Quality Score. This pricing mechanism is designed to promote return on investment for advertisers. This is also why increasing competition for your ad space can lead to higher earnings over time.
Let's look at a simple example. Say we have 2 advertisers, A, and B, who are bidding $2 and $3 for a cost-per-click ad in a particular auction. Advertiser A has a Quality Score of 12, while Advertiser B has a lower Quality Score of 7. By multiplying the Max CPC bid by the Quality Score, we get each advertiser's ad rank.
Advertiser Max CPC bid Quality Score Ad Rank Actual cost to pay
A $2 12 24 21/12 + $0.01 = $1.76
B $3 7 21 minimum auction price
Even though advertiser A's bid is lower than advertiser B's, his Ad Rank is actually higher due to his higher Quality Score. But to determine the price that Advertiser A will pay, we take the next highest Ad Rank (Advertiser B's Ad Rank) and divide that by the Quality Score of Advertiser A, then round up to the nearest minimal currency unit in the advertiser's country. Here, we'll assume that the advertisers are located in the U.S., so we'll add 1 cent.
As a result, if a user clicks Advertiser A's ad, he'll pay $1.76. This amount is then split between the publisher and Google.