The U.S. Federal Trade Commission (FTC) has filed a lawsuit against Amazon, accusing the e-commerce giant of manipulating its advertising auction system to inflate prices and charge advertisers more than necessary. The FTC estimates that Amazon has collected over $20 billion in excess advertising fees from more than 1.2 million advertising accounts. Amazon has denied the allegations, stating that the FTC misunderstands its advertising marketplace and bidding practices.
FTC Alleges Deceptive Bidding Practices
The lawsuit, filed on August 31st in the U.S. District Court for the Western District of Washington, includes participation from 22 states and the District of Columbia. The FTC contends that Amazon violated federal and state consumer protection laws by employing deceptive practices in its advertising auctions. The agency is seeking an injunction to stop these practices, along with damages and other relief for affected parties.
At the heart of the dispute is the discrepancy between how Amazon guides advertisers on its auction system and how it allegedly calculates actual ad prices. Amazon has historically described its system as a “General Second-Price Auction” (GSPA). In this model, advertisers bid for ad placements, and their ad is ranked based on a combination of their bid amount and ad relevance. Crucially, in a true GSPA, the winning advertiser pays only one cent more than the second-highest bid, ensuring they don’t overpay.
However, the FTC alleges that Amazon moved away from this transparent model. Instead of setting a minimum bid that an advertiser had to meet to enter the auction, the FTC claims Amazon secretly implemented a “soft reserve price.” This meant that after an auction concluded, Amazon would retroactively adjust the winning bid to a higher price than what was actually bid by any participant. Essentially, the FTC argues, Amazon manipulated the outcome of the auction after it happened to extract more revenue.
Evolution of Alleged Price Inflation Tactics
According to the lawsuit, Amazon began implementing this practice with “Sponsored Brands” ads in late 2018. The scope of this alleged manipulation expanded in 2019 to include “Sponsored Products” and further in 2023 to “Display Ads.” The FTC presented internal Amazon documents as evidence.
One document reportedly indicated the use of a “proxy second-price” calculated by Amazon, rather than the actual second-highest bid. Another document allegedly used the phrase “use of a hypothetical auction participant” to inflate prices. The FTC views this as akin to “shill bidding,” where a seller artificially drives up prices with bids from entities that have no real intention of purchasing.
The consequences of these alleged practices, according to the FTC, have been significant. The commission claims that the proportion of Sponsored Products ad costs that advertisers paid in full, rather than just the minimum required to win, rose from 30-40% in 2021 to 70% in 2022, and is projected to reach approximately 80% in 2024. This suggests that the GSPA model has effectively transformed into a “highest-bid-wins-and-pays-what-they-bid” scenario for many advertisers.
Estimated Financial Impact on Advertisers
The FTC estimates that these pricing strategies have harmed over 1.2 million advertisers on Amazon, with more than 500,000 of them being small and medium-sized businesses. Since 2018, Amazon is estimated to have collected an additional $20 billion or more in advertising fees due to these practices. The precise amount of restitution and penalties will be determined as the lawsuit progresses.
FTC Chair Lina Khan stated, “Millions of Amazon’s advertising customers have been forced to pay substantially higher prices than they should have. A significant portion of these inflated advertising costs have been passed on to American consumers through higher product prices.”
Amazon’s Defense and Counterarguments
Amazon has strongly refuted the FTC’s claims, arguing that the commission’s lawsuit oversimplifies the complexity of the advertising marketplace. Amazon asserts that advertisers continuously adjust their bids based on ad relevance and actual sales performance, making it impossible to determine the “harm” solely based on auction mechanics.
The company provided data suggesting that, after accounting for inflation, the average cost-per-click for Sponsored Products search ads has remained largely unchanged between 2019 and 2024. Furthermore, Amazon claims that the average winning bid has decreased by 50% during the same period. Amazon also stated that by prioritizing ad relevance over price, advertisers have saved over $80 billion between 2021 and 2025.
Amazon maintains that it has always been transparent with advertisers about its pricing and auction methods. “We have always guided advertisers on pricing and auction methods, and we will present our position in court,” an Amazon spokesperson stated.
Looking Ahead
The legal battle between the FTC and Amazon is expected to be lengthy and complex, delving into the intricacies of online advertising auctions and platform economics. The outcome could have significant implications for how digital advertising markets are regulated and how major e-commerce platforms operate their advertising services.
The FTC’s lawsuit seeks to ensure a fairer and more transparent advertising environment on Amazon, protecting both advertisers and, by extension, consumers from potentially inflated costs.
