For Smart Pricing Google States that... How google knows about conversion rate in Search ad Clicks and Content Clicks? May not be the adwords advertiser not used conversion tracking in their site. If the advertiser not used conversion tracker, how google finds the performance difference between search and content network?
Im not sure, but maybe through analytics, maybe through data within the advertisers account, maybe the changes made within an adwords account provides information enabling google to define whats performing better.
@Pipes There is many questions similar to this issue not answerable.. Final Result : Google Earns more
I agree, and understand your frustration its a win win situation for them, all we can do is make best of any situation.