FTC and 22 states sue Amazon over a hidden surcharge in search-ad auctions
The Federal Trade Commission and 22 state attorneys general sued Amazon on Monday in the U.S. District Court for the Western District of Washington.
The FTC’s release alleges deceptive and unfair practices that secretly inflated prices in Amazon’s search advertising auctions for over seven years, and that the scheme has likely extracted tens of billions of dollars from more than one million brands and sellers.
Tens of billions is the complaint’s language, not a court finding. The filing names more than 500,000 small- and medium-sized businesses among the advertisers. The products at issue are Sponsored Products, Sponsored Brands, and Display Ads that sit next to keyword search results.
Amazon told those advertisers it ran a second-price auction. In a second-price auction, the winner pays one cent more than the next highest bidder. Advertisers treat that as industry standard, a generalized second-price or GSP auction, because it lets them bid closer to what the slot is actually worth. They are not supposed to pay the number they typed.
A first-price auction is the other meter. The winner pays their own bid. Bidders in that format often shade, meaning they bid low on purpose to find the cheapest price that still wins. The complaint says Amazon represented the second-price meter and ran something closer to first-price.
Beginning in 2019, the suit alleges, Amazon added an undisclosed surcharge it called internally a “soft reserve price.” An internal document said the auction had “a surcharge hidden in it.”
The executive in charge of Amazon Ads, quoted in the complaint, said the price “isn’t set by an actual bidder” but is a “proxy 2nd price that we calculate.” Another document said Amazon uses an “invented auction participant” to raise prices. The complaint frames that as essentially a shill bid.
Sponsored Products advertisers paid their own winning bid 30 to 40 percent of the time in 2021, 70 percent in 2022, and about 80 percent in 2024, the FTC says, as the surcharges rose. That is the rate at which the runner-up was no longer another advertiser.
I keep the 80 percent on Sponsored Products, not on every ad product in the suit.
The complaint says Amazon hid the change because revealing it would cause “irrevocable damage to advertiser trust” and a “downward spiral” of lower bids. When advertisers asked if the format had changed, Amazon allegedly gave false answers. Internally, the suit says, the company ramped surcharges into high-volume days such as Prime Day and Black Friday so the jump would look like ordinary competition.
2024 notes among senior executives, including the head of Amazon Ads and the chief digital economist, called a “clever non-transparent way to charge first price” an “incredibly effective way to drive revenue.” An employee quoted in the complaint said the surcharges let Amazon get prices “beyond what [can] be achieved through advertiser competition.”
Lauren Forristal at TechCrunch puts Amazon’s advertising revenue last year at more than $68 billion. Amazon called the lawsuit misguided, said the complaint “fundamentally misunderstands how advertisers operate,” and said advertisers were properly informed about pricing.
Chairman Andrew N. Ferguson said the higher ad costs were largely passed on to American consumers. The Commission voted 2-0.
The bid they typed was supposed to be a ceiling they would almost never hit. On the complaint’s telling, Amazon invented a second bidder so they would hit it anyway, then spent years making sure they did not learn to shade.
The second bidder was a number Amazon typed.
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