Extended product ads are product listings from Google Shopping. It is a CPC [cost-per-click] system and products are displayed in a feed on the right of search results in Google. Each product appears as an image with a price, description and link to the specific website.
It works similarly to Google Adwords.
However, instead of a highlighted banner ad at the top of the search bar, actual products for sale are shown. It is a strategic way of positioning for traffic which originates from a buying attitude rather than information search traffic.
In order to set up Product Listing Ads, both Merchant Centre and Google Adwords accounts must be connected.