I haven't looked at Google Adwords for while. But when I did look at it, the Google literature lead one to believe that it was a pure competitive bid system where ads would show based on highest bid. So theoretically if there are no ads you should be able to appear for a click rate of one penny. But Google estimates the amount of clicks you would get based on impressions (which is based on search volume for the respective keywords) and if there isn't enough yummy money in it for Google, they will not show your ad unless you greatly increase the price you are willing to pay.
So no, it really isn't a competitive bid system. Google has the right to name their own price for advertising on their network. But it is/was dishonest for them to portray themselves as a competitive bid network when they really aren't. It's more of a floor or a minimum revenue thing where Google isn't going to show your ads unless there is a minimum amount of money in it for them.
About four or five years ago or so when I looked at advertising on Google after they killed my traffic the minimum rate to have my ads displayed was $0.10. That isn't cheap for a website which at the time had no revenue.
Every time Google kills my traffic I get an email a week or two later trying to get me to pay for advertising. Anyone else get those emails?
Hello from Google!
A few weeks ago we offered you $100 in free advertising to try ads on Google. We want to remind you that there's still time to take advantage of this offer to drive more traffic to your website.
With what you've learned from your Google Analytics account, you're in the perfect position to attract more visitors. For instance, you could look for keywords that your best customers uses to find you, but where you're not at the top of search results. Those keywords are ripe for search ads.
That email was sent right after they completely killed my traffic. I have a Analytics/Webmaster Tools account and after Google killed my traffic, I got some emails trying to get me to pay for advertising as I do every time Google crushes my traffic. I got a total of 86 visitors from Google in November 2012 compared to 6,000 from Yahoo/Bing (and a couple thousand direct and some other referrals). From Nov. 15 to Dec. 15 I got 81 visitors from Google. In January 2012 I got 650 visitors from Google compared to 6,500 from Yahoo/Bing. In early 2008 Google ranked that site #1 for two weeks or so and I was getting 2,000 visitors per day from Google.
My Yahoo/Bing traffic has held steady for years. Google keeps reducing traffic every year and keeps sending me emails trying to get me to pay for advertising. For most of this year I was getting 600+ visitors from Google each month (about a tenth of what I get from Yahoo and Bing combined) and then it dropped to less than a hundred, then they solicit paid advertising!
I don't think there is any doubt: Google is crooked. Google is manipulating search results to drive advertising revenue. If you aren't getting traffic you have no choice but to pay Google.