FTC and 22 States Sue Amazon Over Secret Ad Surcharge Scheme

The Federal Trade Commission (FTC) and 22 U.S. states have filed a lawsuit against Amazon, alleging the e-commerce giant secretly inflated advertising prices for more than seven years. The legal action claims Amazon deceived over one million brands and sellers by misrepresenting how its ad auctions functioned to extract higher payments.

According to the complaint, Amazon represented its advertising auctions as a "second-price" (Generalized Second-Price) system, where the winning bidder typically pays only one cent more than the next highest bid. In reality, the FTC alleges Amazon effectively converted these into "first-price" auctions, forcing advertisers to pay their full winning bids far more often than disclosed. The lawsuit highlights that for Sponsored Products ads, the percentage of time advertisers paid their own full bid rose to approximately 80%. To achieve this, Amazon allegedly introduced a "soft reserve price" in 2019 and utilized an "invented auction participant"—essentially a shill bid—to artificially drive prices upward. This scheme may have generated tens of billions of dollars in additional revenue for Amazon.

The Mechanics of Ad Deception

Digital advertising typically relies on two primary auction models. In a transparent first-price system, bidders often engage in "bid shading," lowering their bids to avoid overpaying. Conversely, second-price auctions incentivize bidders to submit their true maximum value because the final cost is tied to the runner-up's bid. By claiming to use the second-price model while secretly charging the first price, Amazon allegedly induced advertisers to bid higher than they would have if the system's true nature had been disclosed.

Industry and Consumer Impact

This case underscores the systemic lack of transparency within the "black box" of ad-tech auctions. The FTC argues that the deception impacted over 500,000 small and medium businesses, who may have seen their margins shrink due to inflated costs. The agency contends that millions of customers were misled into paying significantly higher prices, as these inflated advertising costs were largely passed on to American consumers through higher prices for goods.

The Path Forward

Amazon has pushed back against the allegations, stating in a blog post that the complaint "fundamentally misunderstands how advertisers operate." The lawsuit, which includes states such as California, New York, Florida, and Washington, marks a significant escalation in federal and state scrutiny of Amazon's business ecosystem. The court will now determine if Amazon's auction modifications constituted a deceptive trade practice or a legitimate evolution of its advertising platform.