Google has made two major changes to the AdWords algorithm to improve the quality of the calculation and render it "fairer."

The changes were outlined last week in a brief blog post:

1. Quality score calculation improvement. The updated algorithm now takes into account ad position when calculating an ad’s click-through rate (CTR), thus resulting in a more accurate quality score. The quality score ensures that ads compete fairly for position based on their quality and bid, thus putting "high-quality" advertisers in a better ad position and showing the most relevant ads to searchers.
2. Change in criteria for top paid search listings. Previously, an ad in a lower position could not "jump over" another in a higher position to be featured in the "paid listings," or the top yellow bar on the search results page. In other words, if an ad meets the quality threshold, it can be shown in a prominent position, regardless of overall rank. When asked what specifically is weighted, Google's Nick Fox told Search Engine Land that CTR and quality is rated much higher than the bid price in the promotion algorithm, while  the ad rank algorithm weighs bid and quality about evenly. He confirmed that the change only applies to search, not the content network.

Below, finer points gathered from the phone call:

CTR Normalization

Google no longer normalizes the click-through rate data by testing lower placed ads in higher ad positions in a "what-if" scenario. Instead, they are using a statistical formula to normalize the CTR data based on the position of the ad, as to when it is shown to a searcher.

Price Discrepancy for URLs

Because searchers click based on the URL and they aren’t able to see the landing pages until after they click, there may be price discrepancies on the same keyword on the same landing page when the URLs are different. CTR is a large part of quality ratings, so that can play a role as to why the prices are different, assuming everything else is equal.

Historical CTR for Display URL

Google gets as granular as possible, said Fox, so if it can take into account the historical CTR of an ad, it will - which will affect the real time quality score. However, if Google does not have that level of granularity, they will move up to a higher level, such as account level or overall system wide level.