The Federal Trade Commission and 22 states filed a lawsuit against Amazon in August. The suit involves about 1.2 million advertisers, including many small and midsize businesses. Regulators say these advertisers paid more than expected without realizing it.
The case centers on how Amazon sets prices for ads on its platform, according to mashable.com. Amazon claims that competitive auctions determine ad pricing. However, the lawsuit alleges Amazon replaced actual auction results with higher prices to boost profits.
The company reportedly told advertisers it used a ‘second-price’ auction system. In such a system, winners pay just slightly more than the second-highest bid. But according to the complaint, that was not always how Amazon operated.
The lawsuit says Amazon began changing its process in 2019. Instead of using the runner-up bid to set price, the company often charged winners their own higher bids.
Internal documents suggest Amazon was aware advertisers believed in true second-price auctions. One document noted that some advertisers bid as high as $100 or $1,000 because they trusted Amazon not to charge the full amount.
Regulators also say Amazon tested how advertisers reacted to higher prices. The company introduced changes gradually and watched if advertisers adjusted their bids or budgets. After seeing little change, Amazon expanded the increases.
Amazon has offered a different account of what happened. The company said advertisers adjust bids based on real-world performance, not auction mechanics. Amazon argues its system considers how relevant an ad is to shoppers rather than simply choosing the highest bidder.
The company estimates its approach saved advertisers more than $8 billion from 2021 through 2025. It also points to lower ad prices over time. Average winning bids for sponsored-product ads fell by half between 2019 and 2025. Sales from ad clicks increased during the same period.
Amazon said advertisers paid the same or less for advertising that delivered better results. Regulators are asking for an end to the alleged practices and want penalties, damages, and restitution for affected advertisers.
The outcome of the lawsuit could change how Amazon runs its advertising business. The central question now is whether advertisers knew what they were agreeing to pay or if Amazon changed the rules behind their backs.
That’s now up to a court to decide.
Amazon is one of the largest digital advertising platforms in the world, according to a report from Gizmodo. According to the lawsuit, the company allegedly used its market power to overcharge advertisers and sellers. The issue involved Amazon’s advertising auction model for Sponsored Product ads, Sponsored Brands ads, and Display Ads.
Amazon sells ad placements to the highest bidder, which is standard practice. But the FTC claims Amazon misused ‘second-price’ auctions. Under that model, winners should pay only a small amount more than the next-highest bid.
The FTC says Amazon charged advertisers their full winning bid about 80% of the time. The feds provided statistics to show how widespread this issue was.
Amazon denies the accusations. In a blog post, the company said it properly describes its pricing and auctions to advertisers. It also said the FTC misunderstood how advertisers behave.
Amazon’s explanation for savings is one that only works in corporate accounting. Despite this, Amazon seems unable to avoid regulatory scrutiny.
The company recently settled a $2.5 billion case for deceptive practices related to Amazon Prime.
IMAGE: Portrait of Melissa Holyoak, Commissioner of the Federal Trade Commission under President Biden.. Photo: Federal Trade Commission / Wikimedia, Public domain