Amazon Said Advertisers Paid Just Above the Runner-Up. The FTC Says They Paid Their Own Bid 80% of the Time.

The Federal Trade Commission and 22 states filed suit against Amazon on Monday, August 31, in the U.S. District Court for the Western District of Washington. The subject is not what shoppers pay. It is what sellers pay to be seen by them.

Amazon runs an auction to decide which sponsored listings appear when a shopper searches. Advertisers submit a maximum bid. The complaint alleges that for more than seven years Amazon described that auction as a second-price auction, and that from 2019 it was not running one.

What a second-price auction is supposed to do

In a generalised second-price auction, the highest bidder wins the slot but pays a small increment above the next-highest bid rather than paying their own. The design has a specific purpose. It lets an advertiser bid the true maximum they are willing to pay without fear that bidding honestly will cost them the whole of it. The advertiser sets a ceiling and expects the auction to clear below it.

That expectation is what the FTC says Amazon sold and did not deliver.

What the complaint alleges happened instead

• From 2019, Amazon added an undisclosed surcharge the complaint identifies as a "soft reserve price", raising the amount charged above the runner-up bid.
• The complaint describes "invented auction participants" and a "proxy 2nd price" calculation — in effect, bidders who did not exist, setting the price the real bidder paid.
• The FTC says increases to the surcharge were concealed, including around high-volume events such as Prime Day and Black Friday.
• Advertisers who asked directly whether the auction format had changed were, the agency alleges, misled.

The cumulative effect the FTC describes is a second-price auction converted into a first-price one without telling the people bidding in it.

The figures in the complaint

The agency quantifies the shift by how often Sponsored Products advertisers ended up paying their own winning bid rather than a price set by the runner-up:

• 2021: 30% to 40% of the time
• 2022: about 70%
• 2024: roughly 80%

The FTC says the conduct extracted tens of billions of dollars from more than one million brands and sellers, of which over 500,000 were small and medium-sized businesses.

When one of the world's largest online retailers engages in unfair and deceptive conduct, the impact can be staggering. Amazon has millions of advertising customers who were misled into paying significantly higher prices.

The states on the complaint

Twenty-two states joined: 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.

Amazon's response

Amazon called the lawsuit misguided, said it fundamentally misunderstands how advertisers operate, and said advertisers are properly informed about the pricing system.