FTC, States Sue Amazon Over Secret Ad Surcharge Scheme

Today, 22 states joined the Federal Trade Commission in filing suit against Amazon, alleging that the company engaged in deceptive and unfair practices that secretly inflated prices in its online search advertising auctions. The complaint alleges that, for over seven years, Amazon has covertly and substantially increased the prices that more than one million brands and sellers were required to pay to advertise on its platform. As a result, the complaint alleges that Amazon’s scheme has likely extracted tens of billions of dollars from its unwitting advertising customers.

“When one of the world’s largest online retailers engages in unfair and deceptive conduct, the impact can be staggering,” said Chairman Andrew N. Ferguson. “Amazon has millions of advertising customers who were misled into paying significantly higher prices. These higher costs were largely passed on to American consumers. The FTC under President Trump won’t allow this deception to continue.”

The FTC, along with the attorneys general of 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, allege Amazon has imposed undisclosed surcharges on its advertising customers, which include over 500,000 small- and medium-sized businesses that participated in auctions for advertising placements on Amazon.com and its mobile app.

In these auctions, prospective advertisers bid to place Sponsored Product ads, Sponsored Brands ads and Display Ads alongside the results that appear when a consumer searches for a product using a keyword on Amazon’s store. Placements are auctioned to the highest-ranked bidder for each keyword.

As described in the complaint, Amazon has represented to prospective advertisers for years that Amazon runs “second price” auctions where the winner of the auction would only pay “one cent more than the next highest bidder” for each successful bid for an advertising keyword. However, in practice, the complaint alleges that Amazon has charged its Sponsored Products advertisers their own winning bid close to 80% of the time and has effectively converted its nominally “second price” auction into a first price auction.

According to the complaint, Amazon’s “second price” auctions have been described by Amazon, and understood by advertisers, to be run as generalized second-price, or GSP auctions, which have been the accepted industry standard for digital advertising placements.

The complaint states that Amazon has made these or similar representations on its website, in training videos and in other public-facing materials, as well as in presentations made to advertisers by its hundreds of sales personnel. 

The type of auction matters to advertisers because it impacts how they bid. In a sealed first-price auction—the type of auction where winners pay the amount of their winning bid—bidders run the risk that they might overbid. So, in repetitive auctions for the same goods, they will often reduce their bid to determine what the minimum amount needed to win future auctions might be. This is called bid shading.

In second-price auctions, bidders are more likely to bid higher, closer to their true value for the product, because they will only be liable to pay the least bid amount needed to win under the auction’s rules. 

As alleged in the complaint, Amazon told advertisers it ran a GSP, but for years its auction pricing had “a surcharge hidden in it,” in the words of one internal Amazon document. The complaint alleges that, beginning in 2019, Amazon changed its auction rules without notice by adding an undisclosed surcharge that Amazon referred to internally as a “soft reserve price.” This resulted in advertisers paying substantially more than the price determined by the GSP auction. 

According to the complaint, Amazon made this surreptitious change to its auction because it was unhappy about how much revenue its advertising auctions were generating. The complaint quotes from the executive in charge of Amazon Ads who explained internally that the price paid by advertisers “isn’t set by an actual bidder,” but is instead a “proxy 2nd price that we calculate.” In another document quoted in the complaint, Amazon acknowledged it uses an “invented auction participant” to increase prices. The complaint alleges that Amazon’s “invented auction participant” and its hidden “proxy 2^nd price” bids are essentially shill bids. The complaint also quotes from another Amazon employee, who stated that Amazon’s surcharges enable it to obtain prices “beyond what [can] be achieved through advertiser competition.” 

The complaint alleges that Amazon’s unlawful scheme has generated tens of billions of dollars of revenue for the company by, for example, substantially increasing the prices charged to advertisers on ordinary shopping days and applying far greater increases to prices on high-volume shopping days like Prime Day and Black Friday. The complaint quotes notes from a 2024 discussion between senior executives, including the head of Amazon Ads and Amazon’s Chief Digital Economist, where it was acknowledged that Amazon’s “clever non-transparent way to charge first price” has been an “incredibly effective way to drive revenue.”

As described in the complaint, because Amazon understood that revealing the surcharges—and the fact that the auction was no longer a genuine second-price auction—would lead to significant backlash from its advertising customers, Amazon spent years concealing the changes from the public. For example, leading up to the high-volume days, Amazon carefully ramps up surcharges to disguise the fact that it is inflating prices. Amazon has repeatedly deployed such underhanded tactics to increase its surcharges to meet revenue targets. 

Amazon knows that it benefits from its advertisers’ false belief that the prices they pay are set by fair, competitive second-price auctions, according to the complaint. The complaint quotes from Amazon employees acknowledging that advertisers “are operating under the assumption that Amazon uses a GSP auction,” that advertisers “believe Amazon will not simply charge their first price,” and that as a result “many advertisers bid far higher than what they are willing to pay … because they assume [the auction is] a GSP.”

According to the complaint, the truth is that advertisers have not been competing in fair GSP auctions. The complaint alleges that, over the past several years, Amazon’s surcharges have resulted in advertisers paying their own bid amount an increasingly high amount of the time. For Sponsored Products ads, the complaint alleges that the percentage of the time advertisers paid the amount of their bid increased from between 30% and 40% in 2021, to 70% in 2022, and to approximately 80% in 2024 as a result of the surcharges. But Amazon has actively concealed this fact from advertisers to prevent them from lowering their bids, according to the complaint.

The complaint alleges that Amazon and its senior executives took active steps to conceal its surcharge pricing system from its advertisers, including giving false and misleading answers to advertisers who asked the company directly if it had changed its auction format, so that they would continue to be deceived about how the prices they pay are set. The complaint quotes from Amazon’s internal documents, stating that revealing the surcharges would result in “irrevocable damage to advertiser trust” and a “downward spiral” of advertisers lowering their bids, leading to dramatic losses of revenue for Amazon.

According to the complaint, Amazon has continually tested and monitored its customers to increase its prices without getting caught, and, to date, this scheme has been successful. The complaint quotes from one Amazon employee who said that the company’s hidden surcharges are “good for Amazon” because “advertisers must pay more for the same advertising,” and “the benefit to Amazon comes at the cost of advertisers.” 

The Commission vote authorizing staff to file the complaint was 2-0. It was filed in the U.S. District Court for the Western District of Washington. The attorneys on this matter include Jonathan Platt, Darren Lubetzky, Adam Hersh, Vikram Jagadish, Jason Kornmehl and Ishan Shivakumar from the FTC’s Northeast Regional office.