Pay per click (PPC) is an advertising model used on search engines such as Google, where advertisers only pay when a user actually clicks on an ad to visit the advertiser’s website.
Advertisers specify the words that should trigger their ads and the maximum amount they are willing to pay per click.
When a user searches Google’s search engine, adverts for relevant words are shown as “sponsored links” on the right side of the screen, and sometimes above the main search results.
The ordering of the paid listings depends on other advertisers’ bids (PPC) and the “quality score” of all ads shown for a given search. The quality score is calculated by historical click-through rates and the relevance of an advertiser’s ad text and keywords, as determined by Google. The quality score is also used by Google to set the minimum bids for an advertiser’s keywords. The precise formula and meaning of relevance and its definition is in part secret to Google and whose parameters can be dynamically changed.
The auction mechanism that determines the order of the ads has been called a “generalized second price” auction.
Further information on Google Pay Per Click Advertising can be found here.