Chances are you understand the basics of Google’s click auction. If you didn’t you probably wouldn’t be interested enough in PPC to do research, read blogs like this one, or try to maximize your performance on the search engines.
To help you understand, Google’s Chief Economist, Hal Varian, did a video that explains in simplistic detail of how Google’s ad auction works, and why quality plays such an important role. If you haven’t seen it already, I urge you to take 9 minutes out of your day and watch it here. ROI Revolution does a great summarizing the data in ther two-part blog posts that can be found here and here.
Remember that while these posts focus exclusively on Google, as market leader it forms as the benchmark that Microsoft and Yahoo are aiming towards, and they run similar systems.