Typically, if you see an ad first, you are more likely to click that ad over the ad you see later. Meaning, in Google, the search ads are listed along the right hand column. If you are in position one or two, you are more likely to be clicked on than if you are in position seven or eight. Now, the quality score used by Google AdWords takes CTR (click through rate) into account as the primary quality score metric. Ads doomed to be at the bottom of the page, will receive an impression but not a click at a higher rate than an ad at the top. So those ads, sometimes, tend to be doomed, if the CPC is not increased to move the ad up.
Update #2: Google gave me this statement, basically saying, this is an update to how they normalize the CTR. "The first change mentioned in yesterday's blog post simply gives advertisers advance notice that we'll soon be making improvements to the existing technology that we've already been using to account for ad position. We'll employ fresher, updated data that will help us calculate Quality Scores even more precisely," said a Google spokesperson.
Google is now going to change the quality score algorithm to take ad position into account. So while one ad in the top position might have a higher CTR, an ad in the seventh position with a lower CTR should not impact the quality score as much as it did in the past. This should allow all the ads to "compete fairly," as Google said and thus make for a more relevant ad space in Google.
An additional change is with the ads above the organic results. Only ads above a certain quality threshold can be in the top spot, above the organic results. The thing is, if a ad in position 1 did not meet a threshold but ad in position 2 did meet that threshold, then ad 2 would not be promoted to the top spot. With the new algorithm, ad 2 will not be held back by ad 1's lack of quality.
I think these two changes are very encouraging. We have very little forum discussion around it right now.
Forum discussion at DigitalPoint Forums.
Update: Jeremy Mayes reminds me that Google has always normalized the CTR calculation based on ad position. So as Jeremy asks, what is new here? Google made this calculation better? If so, how exactly? I emailed Google to find out more information, I will update this post when I get that information.