Courtesy of the Google AdWords Help Center:
“Even if you have a high quality ad, if advertisers below you are not bidding very much, your actual CPC may not be high enough to qualify your ad to appear in a top position.
With this new formula, instead of considering your actual CPC, we’ll consider your maximum CPC bid, which you control. This means that your ad’s eligibility to be promoted is no longer dependent on the bids of advertisers below you.“
This announcement indicates that Google remains keen to eliminate the long-tail approach to gaining cheap traffic, widely used by so-called (albeit misnamed) arbitrageurs in the SEM industry.
Until this change is implemented, advertisers can continue to place low quality ads in the top positions by bidding on keywords with little competition – generally lengthy, specific phrases.
Like most changes they make, this should be a win for Google and their users – higher prices for their ad inventory and / or better quality ads presented to the users.