The US’ Federal Trade Commission (FTC), alongside 22 US state, has filed a major lawsuit against Amazon for allegedly secretly inflating the prices of its online advertising auctions.
The complaint alleges that over the past seven years Amazon has increased the prices that more than a million brands and sellers were required to pay to place ads on its platform.
In Amazon’s auction process, 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.
In the complaint, the FTC and the states allege that Amazon has run “second price” auctions where the winner of the auction would only pay “one cent more than the next highest bidder” to win the auction.
However, they allege that in practice, Amazon had not, in fact been operating its auctions like that. Instead, they allege that Amazon had charged Sponsored Products advertisers their full bid in nearly 80 per cent of cases.
In effect, it says, it has effectively converted its nominally “second price” auction into a first price auction.
This is important as the bids are sealed. In a sealed first-price auction, bidders run the risk that they might overbid to secure the win (see Sydney’s rental housing market for this working in practice).
In repetitive auctions for the same goods, they will often reduce their bid to determine the minimum amount needed to win future auctions.
In second-price auctions, bidders are more likely to bid 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.
Amazon told advertisers it ran generalised second-price auctions. However, the complaint alleges that “for years” its auction pricing had a “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.
The complaint says that Amazon made the change because it felt that its advertising was not generating enough revenue. Through this alleged unlawful activity, the FTC said Amazon had generated “tens of billions of dollars of revenue”.
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.”
“When one of the world’s largest online retailers engages in unfair and deceptive conduct, the impact can be staggering,” FTC chairman Andrew Ferguson said in an announcement yesterday.
“Amazon has millions of advertising customers who were misled into paying significantly higher prices. These higher costs were largely passed on to American consumers.”
According to the complaint, the online retailer has “continually tested and monitored its customers to increase its prices without getting caught, and, to date, this scheme has been successful.”
One Amazon employee, quoted in the announcement, said the company’s 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”.
Amazon’s response
In response to the lawsuit, Amazon has published a 2,600-word response saying that the FTC had overly simplified the matter and had shown “little interest” in “engaging with the facts”.
Amazon’s response had noted that it changed the way that its auctions run.
“In 2014, we started testing advanced machine learning-based relevance models in an attempt to predict how likely a shopper is to find an ad useful,” the company wrote in the post.
“We intended to test this over a long period of time, and in fact did, before we rolled out broadly. By 2019, they were in use across all our Store advertising to bring greater benefits to shoppers and advertisers.
“Since we first introduced ads in our Store in 2006, we have priced clicks using a form of generalised ‘second-price’ auction, which was and continues to be the industry standard and means that advertisers may pay less than their bid… Our auctions took relevancy into account to a degree, but they were much more weighted toward the highest bid amount.
“While we could have decided to continue to favour the higher bids, we instead chose to focus on more relevant bids to ensure the best possible shopper and advertiser experience. As our advanced machine learning-based relevance models more heavily weighted relevance versus highest bid, we saw winning bids drop significantly. That was good for advertisers and shoppers but meant premium placements in our Store were being undervalued.”
It added that it had introduced a new “soft reserve prices” feature which assigned a real-time minimum value to an ad spot. It also introduced a “hard reserve” which was the minimum bid to win.
“Our auction looks at a combination of which ad is most relevant to the customer and the price an advertiser is willing to pay…With this approach, in 2024, approximately 92 per cent of selected Sponsored Products ads were not the highest bid, often by a wide margin. The mean winning advertiser’s bid is typically about the 128th bid by amount. This means the winning advertisers’ cost is almost always lower than if we had selected ads on bid alone.
“The FTC claims advertisers were harmed because they didn’t understand how our auction worked and therefore overpaid. Not only do we properly describe our pricing and auctions to advertisers, but this claim fundamentally misunderstands how advertisers behave.”
Amazon said it estimated that advertisers saved more than $8 billion from 2021 to 2025 as a result of its incorporating ad relevancy into the auction.
