FTC and 22 States Sue Amazon Over Alleged $20 Billion Advertising Auction Manipulation

The federal court in the Western District of Washington will now determine whether Amazon's internal advertising auction mechanics constitute deceptive pricing, holding the power to order billions in restitution and force structural changes to the platform's ad business. The Federal Trade Commission, joined by 22 state attorneys general, filed a 181-page complaint on Monday seeking to halt what it characterizes as a covert scheme to inflate the cost of sponsored product listings.[1][2]

The core of the government's argument rests on transparency and the specific mechanics of second-price auctions. For years, Amazon told the 1.2 million brands and sellers on its marketplace that its advertising slots were sold through a generalized second-price model, where the winning bidder pays just one cent more than the runner-up.[1][3]

According to the FTC, Amazon quietly abandoned that competitive model in late 2018. The complaint alleges the company introduced an undisclosed "soft reserve price" or "proxy second price," effectively inserting a synthetic bid into the auction to raise the final cost for the winning advertiser without their knowledge.[2][4]

Regulators contend this internal pricing mechanism caused advertisers to pay their maximum bid amount roughly 80% of the time by 2024, a sharp increase from between 30% and 40% in 2021. The FTC estimates this system extracted an additional $20 billion from advertisers, costs that FTC Chairman Andrew N. Ferguson stated were "largely passed on to American consumers."[2][3]

Amazon's defense counters that the FTC fundamentally misunderstands how modern digital advertising operates. The company argues that advertisers adjust their bids based on real-world conversion performance and return on investment, not the technical descriptions of backend auction mechanics.[1][2]

The retailer maintains that its auction algorithm prioritizes ad relevancy over raw bid amounts, a shift that actually benefits sellers by connecting them with interested buyers. According to Amazon, average winning bids for Sponsored Products search ads fell 50% between 2019 and 2025, and roughly 92% of placed ads are not awarded to the highest absolute bidder.[1]

Amazon further estimates that even if advertisers kept their bids static, the platform's focus on relevancy saved them over $8 billion from 2021 to 2025. The company asserts that the average cost-per-click remained flat when adjusted for inflation, while conversion rates grew 24% over a four-year period.[1]

The tension between these two narratives—the FTC's focus on the promised auction mechanics versus Amazon's focus on the ultimate return on ad spend—defines the legal battle ahead. Internal Amazon documents cited by the FTC allegedly show executives acknowledging that the non-transparent pricing was an effective revenue driver, and expressing concern that revealing the surcharges would cause a downward spiral in advertiser bids.[2][4]

The lawsuit targets a critical growth engine for the e-commerce giant. Amazon's advertising business has grown rapidly, becoming a central pillar of its profitability alongside its cloud computing division, and establishing the company as the third-largest digital ad platform globally.[3]

For the more than 500,000 small and midsize businesses that rely on Amazon's marketplace, the outcome of this litigation will dictate the future cost of reaching customers. The court must now weigh whether a platform's internal optimization of ad relevancy crosses the line into deceptive price manipulation when the underlying auction mechanics are not fully disclosed to the participants.[1][4]