How do cost-per-click (CPC) ads compete with cost–per–thousand impressions (CPM) ads on the Display Network
- CPC bids are effectively converted to CPM bids
- CPM bids are effectively converted to CPC bids
- Ads using CPC bids are not allowed to compete on the Display Network
- CPC and CPM bids only compete against bids of the same type
When CPC and CPM ads compete for the same Display Network placement, adwords uses eCPM to compare ad rank. AdWords converts CPC to ECPM ( CPC equivalent bid) Google estimates how many clicks the ad might receive in 1000 impressions to get the comparison, the resulting figure is the ad’s eCPM, or effective cost per impressions.
To keep things fair, when CPC and vCPM ads compete for the same Display Network placement, the two types of ads are compared apples-to-apples on how much they’re effectively willing to pay for the impression. With a vCPM ad, the max viewable CPM bid represents how much the advertiser is willing to pay for each 1,000 viewable impressions; with a CPC ad, Google estimates how many clicks the ad might receive in 1,000 impressions to get the comparison.
Read more here: https://support.google.com/adwords/answer/2630842?hl=en