Amazon is facing an advertising surcharge lawsuit from the US Federal Trade Commission and 22 states, which allege that the company secretly increased the amount businesses paid to advertise on its platform.
The complaint, filed on Monday, claims Amazon altered its online advertising auctions over more than seven years, affecting more than one million brands and sellers. The alleged scheme may have generated tens of billions of dollars in additional revenue for the company, the FTC said.
The case focuses on Amazon’s Sponsored Products, Sponsored Brands and Display adverts, which appear alongside search results and elsewhere on the retailer’s website. The FTC alleges that Amazon misled more than 500,000 small and medium-sized businesses about how the auctions operated.
How the alleged Amazon advertising surcharge worked
Advertisers were told they were taking part in a “second-price” auction. Under that system, the successful bidder would pay one cent more than the next-highest genuine bid, rather than paying the full amount they had offered.
The FTC claims that arrangement encouraged businesses to bid aggressively because they believed competition would determine the final price.
But from 2019, Amazon allegedly introduced an undisclosed charge known internally as a “soft reserve price”. The complaint also refers to an “invented auction participant” used to raise the price advertisers had to pay.
In effect, the regulator alleges, Amazon inserted a notional competing bid into the process, meaning prices could be pushed higher even when there was no real advertiser willing to pay that amount.
The FTC says Sponsored Products advertisers were charged their entire winning bid nearly 80% of the time. It alleges that the system therefore operated in practice more like a first-price auction than the second-price model businesses had been led to expect.
According to the complaint, Amazon kept the change hidden because it feared advertisers would reduce their bids if they understood the new pricing mechanism, reducing the company’s advertising income.
Amazon generated more than $68 billion in advertising revenue last year.
Amazon rejects the FTC allegations
Amazon described the lawsuit as “misguided” and said the complaint “fundamentally misunderstands how advertisers operate”.
In a blog post, the company said its auctions assess billions of bids across different advertising placements and formats, meaning prices naturally vary. It also said advertisers were “properly” informed about the way pricing worked.
The 22 states joining the FTC are 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.
