FTC & 22 States Sue Amazon Over Alleged $20 Billion Advertising Scheme

Key Takeaways

• FTC and 22 States Sue Amazon: A bipartisan coalition of 22 states and the Federal Trade Commission alleges Amazon manipulated its advertising auctions to secretly overcharge businesses.
• More Than $20 Billion Allegedly Overcharged: Regulators say more than 1.2 million advertisers, including hundreds of thousands of small and medium-sized businesses, paid inflated advertising prices.
• Second-Price Auctions at the Center of the Case: The lawsuit alleges Amazon told advertisers they would pay only enough to beat the next-highest bid while secretly manipulating the mechanism used to establish that price.
• Regulators Allege Broader Consumer Harm: The coalition argues that higher advertising costs likely flowed through to consumers in the form of higher prices for products, including groceries and pharmacy goods.

Deep Dive

The Federal Trade Commission and a bipartisan coalition of 22 states have sued Amazon, accusing the company of secretly manipulating the auctions that determine advertising prices on its marketplace and extracting more than $20 billion from businesses that believed they were competing under a different set of rules.

The lawsuit states that Amazon imposed undisclosed surcharges on more than 1.2 million advertisers, including more than 500,000 small and medium-sized businesses. Regulators say the practices allowed Amazon to push advertising prices above the levels produced by genuine competition while continuing to tell customers that its ads were sold through “second price” auctions.

Amazon disputes the allegations. The company said the FTC fundamentally misunderstands how advertisers behave on its platform and rejected the accusation that it engaged in a companywide effort to deceive customers as “patently false.” Amazon also said advertisers saved more than $8 billion from 2021 through 2025 as a result of its emphasis on ad relevance rather than bid price alone.

Amazon has long told advertisers that winners pay only the amount necessary to beat the next-highest bidder. In a conventional generalized second-price auction, an advertiser might bid $2 for a placement, face a competing bid of $1 and ultimately pay $1.01. The structure encourages advertisers to bid closer to what an ad placement is actually worth to them because winning does not necessarily mean paying their maximum bid.

The FTC and the states allege that Amazon quietly broke that bargain. According to the complaint, Amazon introduced an undisclosed “soft reserve price” into its advertising system beginning in 2019, effectively creating a higher second-place bid after advertisers had submitted their offers. Internal Amazon terminology cited in the complaint included a “proxy 2nd price” and an “invented auction participant.” Regulators characterize the resulting mechanism as essentially a form of shill bidding: Amazon could raise the price paid by the winner without taking the risk that a genuine competing bidder would have faced of accidentally winning the auction.

The complaint alleges that Amazon's surcharges increasingly pushed Sponsored Products advertisers toward paying their own bids rather than a price determined by the next-highest genuine competitor. Regulators say advertisers paid their full bid roughly 30% to 40% of the time in 2021, about 70% in 2022 and approximately 80% by 2024.

The lawsuit argues that Amazon understood why advertisers might behave differently if they knew how prices were actually being calculated. In a first-price auction, bidders have an incentive to reduce, or “shade,” their bids to avoid paying more than necessary. A second-price auction gives them more reason to bid closer to their maximum willingness to pay because the competing bid, rather than their own, is supposed to determine the final price.

Regulators allege Amazon benefited from telling advertisers they were participating in the latter while increasingly charging them like the former. sInternal company documents quoted in the complaint figure heavily in the government's case. One described Amazon's auction pricing as having a surcharge “hidden in it.” Another acknowledged that the price paid by advertisers was not necessarily established by an actual bidder. Regulators also cite internal discussions indicating that disclosure of the system could damage advertiser trust and encourage businesses to lower their bids, reducing Amazon's revenue.

The alleged increases were not uniform. The complaint says Amazon raised surcharges more aggressively during high-volume shopping periods such as Prime Day and Black Friday, when competition for advertising placement intensifies. Regulators allege the company carefully increased the charges around those events in ways intended to make the changes less apparent to advertisers.

The states and the FTC contend that the consequences extended beyond the businesses buying the ads. Advertising costs are an expense for merchants selling everything from groceries and clothing to pharmacy products, and the government alleges that much of the additional cost was ultimately incorporated into prices paid by shoppers.

Amazon rejects that reasoning as well. The company argues that advertisers adjust their bids according to the actual performance of their campaigns rather than relying on simplified descriptions of auction mechanics. It has also pointed to declining average winning bids and improvements in advertising performance as evidence against the government's contention that advertisers were harmed.

Along with the FTC, attorneys general from 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 joined the complaint.

The plaintiffs allege violations of federal and state consumer-protection laws, including the Federal Trade Commission Act and individual state statutes governing deceptive and unfair business practices. They are seeking an injunction against the challenged practices as well as restitution, civil penalties and other monetary relief.

The lawsuit is notable not simply for the amount of money at stake, but for the conduct regulators say produced it. Digital advertising auctions are largely invisible to the businesses participating in them. Bids are submitted and placements awarded in fractions of a second, leaving advertisers dependent on the platform's description of the rules and the information it chooses to disclose.

The government's case is that Amazon exploited precisely that dependence. Whether regulators can prove it will now turn on something far less opaque: what Amazon told its advertising customers, what its internal systems actually did, and whether the difference between the two violated the law.

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