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When you put in maximum amount that you would spend, that could vary depending on the popularity of the keyword.
How can you guarantee yourself the first postion on the right hand nav bar? Overture is pretty simple, but I can't figure out Ad Words yet.
If the description is dead on relevant to the term, and contains the term, with some compelling fluff text, you should be in. I don't see a very immense advantage of #1 versus #2 or 3 for that matter. Its all in how it is written.
Your goal should be to increase the CTR of your ads. Just browse through some of the old threads in this forum and you will find some real good tips to increase CTR.
The example in the second paragraph should clear all your doubts.
What keeps people from putting a bid way out there and then just paying pennies over the next lowest competitor?
That's the whole point :)
You need not pay more than what is required to stay on top of your competitor.