Jeremy C. has a post about ad auctions. At the end he says something that you may have heard before, but never as clearly or succinctly put:
Let me give you a disturbing vision… Google is actually operating a CPM bidding system. Yup. Your bid position is a consequence of the value you give to Google, per thousand impressions - but quantised to a penny per click.
It's pretty important to grok this if you want to understand AdWords...