What method does Google use to determine which site is better, the answer is the Pagerank system.

Pagerank is as the name suggests a ranking system of pages. It works on the basis that if a website ABC.COM has been linked from a website XYZ.COM, abc.com must have some good content and therefore Google will count the link from XYZ.COM as a vote for ABC.COM. You can check your Pagerank on Google by downloading the Google toolbar from http://toolbar.google.com

The Pagerank™ scale goes from 1 to 10 on the Google toolbar and from 1 to 7 beside listings in the Google directory. A less important site is of course a site with a PR of 1 and a very very important site is a site with a PR of 7 or 10, in the directory or toolbar respectively.

The more links or votes a site has the more important it must be and therefore the higher it will rank for search words which it is relevant to, right?, WRONG!.

Google does not simply count the number of incoming links a page has, if that was the case every webmaster from Iceland to Vietnam would try and exchange links to every Tom, Dick and Harry website that would let them. In Googles own words:

"Google looks at more than the sheer volume of votes, or links a page receives; it also analyzes the page that casts the vote. Votes cast by pages that are themselves "important" weigh more heavily and help to make other pages "important."

Hopefully your beginning to get the idea. The idea is to have your page linked to by as many high quality and high pageranked sites as possible. Right? RIGHT and WRONG.

WRONG BECAUSE, you see the Google Pagerank system also takes into account the number of links the page that has linked to you has. The reasoning for this is that a page X has a certain amount of voting PR, if your site Y is the only link from that page X, then Google feels confident that page X thinks your page Y is the best link it has and will give you more PR. If however page X has 50 links, page X could think your only the 50th best link. Hence the more links a page has the less of a PR boost your site will get.

RIGHT BECAUSE, linking to a site with a 6+ PR will provide a significant boost to your PR in most cases, but in cases where the site also links with 100 other sites the boost will be almost zero. Likewise if a site has a PR of just 2 but you and only one other site are linked from it, then the PR boost would be more than the site with 100 links and a PR of 6.

Google Pagerank formula
It's beginning to come complex isn't it, just wait till you see this formula. It looks scary for non math's people.

First let me explain what the damping factor is. The damping factor is the amount of your PR which you can actually pass on when you vote / link to another site. The damping factor is widely known to be .85, this is a little less then the linking pages own PR.

PR(A) = (1-d) + d(PR(t1)/C(t1) + ... + PR(tn)/C(tn))

In layman's terms PR(A) is the Pagerank boost your page A will get after being linked from someone else's site (t1). PR(t1) is the pagerank of the page which links to you and C(t1) is the amount of total links that (t1) has. It is important to know that a pages voting power is only .85 of that pages actual PR and this voting power gets spread out evenly between all sites it links to.

Imagine http://www.akamarketing.com was linked by XYZ.COM's link page which had a PR of 4 and 9 other links, here's how the formula should look like:

PR(AKA) = (1-.85) + .85*(4/10)
PR(AKA) = .15 + .85*(.4)
PR(AKA) = .15 + .34
PR(AKA) = .49
To sum up my site would get an injection of .49 PR after being linked from a page with a PR of four and 9 other links.

Let's say I was linked from a site with a PR of 8, double the previous example's amount, which had 15 other links, a total of 16 outbound links, my boost would be:

PR(AKA) = (1-.85) +.85*(8/16)
PR(AKA) = .15 + .85(.5)
PR(AKA) = .15 + .425
PR(AKA) = .575

The above two worked examples show that not only is the PR of the linking page important but what is also important is how many other sites are also linked to from that page.

Pagerank™ is widely known to be biased towards big name directories such as Dmoz.org, Yahoo and Looksmart.

This is true, especially in the case of Dmoz.org. These ODP links are treated like gold by the Pagerank™ system. It doesn't even matter what the individual PR of the category page is. I have seen sites gain a large PR boost on the toolbar as soon as Google updates its directory with the latest one from Dmoz.org. This is because Google uses its own version of the ODP for the Google web directory.

Don't believe ODP links are very important to Pagerank™?
Don't believe a listing in the ODP will boost your ranking?

Well they are and it will. Perform a search for almost anything on Google and you'll discover that 75-80% of the top 10 results are also indexed in the Google directory and therefore also listed on Dmoz.org. The fact of the matter seems to me to be if your not listed with the ODP, you shouldn't expect much traffic from Google.

Getting a listing is not difficult, it does sometimes take time but it's not difficult. Just make sure your site has good content and follow the guidelines for adding a URL. Try to get your index page listed at least. I say at least because although ODP claims only to list your index page, there are plenty of sites with 5 - 10 pages listed.

Therefore if your site has very distinctive sections you can submit each section, beware though that this must be done slowly, otherwise you may be banned from the directory altogether for spamming. Once Google updates its directory these listings could do wonders for your sites Pagerank™. My article entitled Open Directory Project guide is a complete guide to getting into the ODP, I highly recommend you read it.

Regarding Yahoo and Looksmart, Pagerank™ will usually allocate a more than normal amount of PR boost for any sites listed. Tips on getting listed in Yahoo can be read in Yahoo submitting tips.

If you're a non-commercial site or have a site that's almost completely non-commercial you can get into the Looksmart directory through http://www.zeal.com. I really love this site, just like Google obtains its directory results from ODP, Looksmart obtains its non-commercial listings from the Zeal web directory. Without Zeal I would have to fork out hard earned cash and all my site does is provide free information in the form of articles and tutorials.

To continue, I submitted AKA Marketing.com on a Tuesday and was listed in Zeal by Thursday morning. On Monday I checked my logs and found lots of referrals from Looksmart, I was in Looksmart already. I looked at my logs later only to find MSN had updated its database from the Looksmart database and was sending me loads of visitors because of the good listing I got. My site was listed in Zeal, Looksmart and MSN within six days. Needless to say I highly recommend you get over to Zeal.com and submit your site.

Before you can submit a site however you must pass a member quiz, the quiz is a fairly simple straightforward one, you might however learn a thing or two while doing it.

If you happen to be a webmaster that has a listing in all three of Dmoz.org, Yahoo and Looksmart then I'm guessing your site has good to very good PR and rankings.

Content quoted from akamarketing.com