Every time a shopper searches on Amazon or Walmart, a real-time auction occurs to determine which ads are shown, and in what order.
Both Amazon and Walmart use a second-price auction that consider the bid and also the relevance of the search term when deciding who wins the placement.
In a second-price auction, all participants submit their bids simultaneously and without knowing the bids of the other auction participants. The advertiser who has submitted the highest bid wins the auction, but only pays the next-highest bid as a price.
Let's illustrate what this means with an example:
Example
There are 3 bids for an ad placement:
Seller A bids $0.60
Seller B bids $0.75
Seller C bid $0.20
Seller B wins the placement the the highest bid of $0.75
Seller B does NOT pay $0.75 for every click, though.
Instead, Seller B will pay $0.60 per click, which is the second highest bid.
This style of auction has a few nice properties for the sales channels, but for advertisers it means that what it means for advertisers is that it is always in your best interest to bid the amount the placement is truly worth to you.
This can be proven with an example.
Let's Pretend we're Seller B from the example above. And let's say on average, let's say we make $0.75 every time someone clicks on our ad.
Example
Pretend we're Seller B from the example above. And let's say on average, we make $0.75 every time someone clicks on our ad.
As long as we bid above $0.60, we'll win the placement and pay $0.60 (the second-highest bid by Seller A). Having paid $0.60 and earned $0.75, we net $0.15. We'd net $0.15 if our bid was $0.61 or $1.00
However - we can't know ahead of time that seller A will be bidding $0.60
Suppose we had instead chosen to bid $0.61, but Seller A had bid $0.62.
In this case, we've lost out on a potential earnings of $0.13, and we would always be better-off setting our bid at $0.63 to capture these earnings.
This remains true all the way up to our $0.75 "true" value, beyond which we would lose money if we were to increase the bid.
Because the game-theoretic optimal strategy in this type of auction is so well-proven and understood, the decision of how to bid is very easy - to always bid what the placement is worth to you.