The Federal Trade Commission (FTC) and 22 states have filed a major lawsuit against Amazon, accusing the tech giant of running a secret ad surcharge scheme. The Amazon FTC lawsuit, filed Monday, claims that the company spent more than seven years quietly increasing the prices advertisers paid through its online ad auctions. This alleged practice is said to have affected over 1 million brands and sellers, potentially generating tens of billions of dollars in additional revenue for the company.
The Core of the Amazon FTC Lawsuit
The Amazon FTC lawsuit centers on the company’s advertising practices, specifically its Sponsored Products ads, Sponsored Brands ads, and Display ads that appear alongside search results. According to the complaint, Amazon told more than 500,000 small and medium-sized businesses that it operated a “second-price” auction system. In this system, the winning advertiser would pay just one cent more than the next-highest bid, rather than the full amount of their own bid. This gave businesses an incentive to bid high, trusting the system would keep their actual costs in check.
The FTC alleges this was a deliberate deception. Because advertisers believed they would never pay their full bid amount, they were willing to bid more aggressively. This created a situation where Amazon could manipulate the auction process without advertisers ever knowing they were being overcharged.
How the Secret Scheme Operated
The FTC alleges that starting in 2019, Amazon made a surreptitious change without informing advertisers. The company added a hidden surcharge that Amazon internally called a “soft reserve price.” More concerning, Amazon used what one internal document called an “invented auction participant”—essentially a fake bidder—to push prices higher than true competition would have produced.
The complaint argues this amounted to a shill bid. Rather than the price coming from a real competing advertiser, Amazon was manufacturing higher numbers for advertisers to beat. As a result, the FTC claims Amazon charged Sponsored Products advertisers their own full winning bid close to 80% of the time. This effectively turned what was marketed as a second-price auction into a first-price one, where advertisers paid the maximum amount they were willing to spend rather than a fair market price.
The Scope and Impact of the Allegations
This Amazon FTC lawsuit affects a massive portion of the e-commerce ecosystem. More than 1 million brands and sellers may have been impacted by these practices. The 22 states joining the FTC in this action 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 financial stakes are enormous. Amazon generated more than $68 billion in advertising revenue last year, and the FTC claims the alleged scheme may have generated tens of billions of dollars in additional revenue for Amazon through this hidden pricing manipulation. For small and medium-sized businesses that rely on Amazon advertising to reach customers, the impact has been particularly significant, as they often operate on thinner margins and cannot absorb unexpected cost increases.
Amazon’s Response to the Lawsuit
In a blog post, Amazon described the FTC’s lawsuit as “misguided,” arguing that the complaint “fundamentally misunderstands how advertisers operate.” The company added that its auctions evaluate billions of bids across different placements and formats, so prices naturally vary. Amazon maintains that advertisers are “properly” informed about the pricing system.
However, the FTC’s complaint suggests that Amazon deliberately kept this scheme hidden because disclosing it could have led advertisers to lower their bids, which would have cut into the company’s substantial ad revenue. This raises serious questions about transparency and fair dealing on the platform.
What This Means for Amazon Advertisers
For businesses that advertise on Amazon’s platform, this Amazon FTC lawsuit raises significant concerns about transparency and fair pricing. The FTC claims that because businesses believed they’d only ever pay slightly more than the runner-up, they had an incentive to bid high. If these allegations are true, advertisers may have been paying significantly more than they should have for years.
The Shift from Second-Price to First-Price Auctions
The alleged scheme represents a fundamental change in how Amazon’s ad auctions operated. The FTC claims Amazon effectively converted a second-price auction—where advertisers pay just above the next highest bid—into a first-price auction, where advertisers pay their full bid amount. This distinction is crucial because it dramatically affects how much advertisers pay for the same ad placement.
In a legitimate second-price auction, advertisers can bid their true maximum value without fear of overpaying. In a first-price auction, advertisers must guess what the market will bear, often leading to overpayment. By secretly making this switch, Amazon may have been able to capture significantly more revenue from unsuspecting advertisers.
The Broader Implications
This Amazon FTC lawsuit is part of a larger trend of increased regulatory scrutiny on major tech platforms. The FTC has been actively investigating Amazon’s business practices across multiple fronts, including its e-commerce marketplace and Prime subscription service. This lawsuit specifically targets Amazon’s advertising business, which has become a major revenue driver for the company.
The outcome of this case could have far-reaching consequences for digital advertising as a whole. If the FTC proves its case, other platforms may face similar scrutiny over their auction practices. This could lead to greater transparency requirements across the industry, potentially benefiting advertisers everywhere.
What Comes Next
The lawsuit will proceed through the legal system, and it may be months or years before a resolution is reached. If the FTC prevails, Amazon could face significant penalties and be required to change its advertising practices. For advertisers, this could mean more transparency in how ad prices are determined and potentially lower costs.
For now, businesses that advertise on Amazon should pay close attention to how this case develops. The outcome could reshape the advertising landscape on one of the world’s largest e-commerce platforms. Advertisers may want to review their current ad spending and consider diversifying their advertising channels to reduce reliance on Amazon.
The Amazon FTC lawsuit represents a significant challenge to the company’s advertising practices. With allegations of secret price manipulation affecting over 1 million sellers and potentially generating tens of billions in extra revenue, the stakes could not be higher. Whether the FTC can prove its case remains to be seen, but one thing is certain: this lawsuit will have lasting implications for how digital advertising auctions operate and how platforms must be transparent with their advertisers.
As the legal process unfolds, advertisers and regulators alike will be watching closely to see what this means for the future of e-commerce advertising.
