The Federal Trade Commission (FTC), along with 22 states, has initiated a lawsuit against Amazon, alleging the company has been covertly raising advertising fees for businesses using its platform.
Filed on Monday, the lawsuit accuses Amazon of secretly elevating advertising costs for over seven years through its online auction system. The complaint indicates that these practices potentially impacted more than a million brands and sellers, leading to billions of dollars in extra revenue for Amazon.
The states participating alongside the FTC include Alaska, Arizona, California, Colorado, Florida, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Nebraska, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Vermont, and Washington.
The focus of the lawsuit is on Amazon’s various advertising formats, such as Sponsored Products ads, Sponsored Brands ads, and Display ads that appear with search results. The FTC asserts that Amazon informed over 500,000 small to medium-sized businesses that it operated on a “second-price” auction model. In this setup, the winning bidder would supposedly pay just one cent more than the next highest bid, rather than the total of their actual bid. This assurance encouraged businesses to bid higher, believing their final costs would be managed by the auction system.
However, the FTC claims that in 2019, Amazon implemented a “secret” modification without informing the advertisers. The company introduced a hidden fee, referred to internally as a “soft reserve price,” and employed what one internal document termed a “fictitious auction participant” to artificially inflate the bids. Essentially, this meant that instead of prices reflecting genuine competition, Amazon was crafting higher numbers that advertisers had to overcome. Consequently, the FTC argues that nearly 80% of the time, advertisers were charged their full winning bid under what was advertised as a second-price auction, effectively converting it into a first-price auction.
According to the FTC, Amazon’s intentions behind this change were driven by a desire for increased advertising income while concealing the adjustments to prevent advertisers from lowering their bids, which would have reduced that revenue.
In the previous year, Amazon reported advertising revenues exceeding $68 billion.
In response to the lawsuit, Amazon characterized the FTC’s claims as “misguided,” contending that the complaint reflects a fundamental misunderstanding of how advertisers function.
The company emphasized that its auction process assesses billions of bids across varied formats and placements, resulting in naturally fluctuating prices, and asserts that advertisers are “accurately” informed about the pricing mechanisms.
