Google Ad Auction
When people think of an auction, they often think of a prize being sold for the highest bid. But the AdWords auction works a little differently, where the winner only pays the minimum amount necessary to maintain their position on the page. That means you'll only pay the minimum necessary to beat the person below you. In fact, their quality-based pricing system ensures that you'll often pay less than your maximum bid.
An excellent video has been produced by Google which explains this once and for all to the ordinary citizen.
Please watch Video Introduction to the Google Ad Auction created by Google's chief economist.