Inside Amazon's 'Secret' Ad Pricing System, According to the FTC

 

Inside Amazon's 'Secret' Ad Pricing System, According to the FTC

## A federal lawsuit alleges Amazon raised the price floor in some auctions after bids had been entered, costing advertisers billions.

For years, Amazon told advertisers it was running a fair "second-price" auction. The winner would pay just one cent more than the second-highest bidder. It was a system designed to encourage advertisers to bid their true value. But according to a sweeping new lawsuit, that's not what was happening at all.

On August 31, 2026, the Federal Trade Commission (FTC) and a bipartisan coalition of 22 states filed a lawsuit in federal court in Washington state. The complaint accuses Amazon of secretly and systematically overcharging more than 1.2 million advertisers—including over 500,000 small and medium-sized businesses—by manipulating the online auctions it uses to set advertising prices .

The alleged scheme, which the FTC says has been running since 2019, may have illegally extracted more than **$20 billion** from unwitting advertisers . "Amazon has rigged billions of ad auctions," California Attorney General Rob Bonta said at a press conference announcing the lawsuit .

## The Promise vs. The Reality

The FTC's lawsuit centers on three types of advertisements that appear alongside Amazon's search results: Sponsored Products, Sponsored Brands, and Display Ads . For years, Amazon publicly described its system as a "second-price" or "generalized second-price" (GSP) auction, which has been the industry standard for digital advertising placements .

Here's how a second-price auction works: prospective advertisers submit bids for a keyword. The winner, rather than paying their full bid, pays only one cent more than the next highest bidder. For example, if one company bids $200 and another bids $190, the winner pays $190.01 . This system encourages advertisers to bid more aggressively, knowing they won't overpay.

The FTC alleges that Amazon promised this system but delivered something else entirely .

Beginning in 2019, Amazon made a surreptitious change to its auction rules without notifying advertisers. The company began adding an undisclosed surcharge, referred to internally as a "soft reserve price," and also used an "invented auction participant" to artificially inflate prices . Instead of being charged the second-price amount, advertisers were often charged their full winning bid or a significantly inflated price.

Internal Amazon documents, cited in the lawsuit, describe the company's process as a "clever non-transparent way to charge first price" . One internal discussion noted that the price paid by advertisers "isn't set by an actual bidder," but is instead a "proxy 2nd price that we calculate" .

According to the complaint, the proportion of Sponsored Product advertisers paying more than they should have rose dramatically over the years—from around 30-40% in 2021, to around 80% by 2024 .

## The Defense

Amazon has strongly denied the allegations, publishing a detailed blog post on the day the lawsuit was filed. In it, the company argues that the FTC fundamentally misunderstands how its advertising business operates .

Amazon claims that its auction model is designed to prioritize ad relevancy for customers over simply the highest bid. The company says that in 2024, approximately 92% of selected Sponsored Products ads were not the highest bid, often by a wide margin . The company also argues that advertisers adjust their bids based on real-world outcomes—the sales they generate—not on theoretical descriptions of auction mechanics .

The company stated that from 2019 to 2024, the average winning bid for Sponsored Products search ads fell by 50%, and that incorporating ad relevancy into its auction model saved advertisers over $8 billion from 2021 to 2025 . It also noted that average cost-per-click for advertisers remained flat when adjusted for inflation during that same period .

"The FTC cherry-picked a small number of materials, such as a few online educational videos and training content that contained older or simplified examples about how our auctions are run," Amazon said in its statement .

## Staggering Impact

FTC Chair Andrew Ferguson said the scale of the alleged deception is "staggering." "Amazon has millions of advertising customers who were misled into paying significantly higher prices," he said. "These higher costs were largely passed on to American consumers" .

The lawsuit estimates that the scheme has extracted more than $20 billion from advertisers over the seven-year period . The FTC is seeking monetary relief, civil penalties, and an injunction to stop the alleged practices .

## A Familiar Battle

This is the third major lawsuit the FTC has filed against Amazon. In September 2025, the company agreed to pay $2.5 billion to settle allegations that it used deceptive practices to enroll consumers in Amazon Prime and made it difficult to cancel . Another case, in which the FTC accuses Amazon of illegally maintaining a monopoly in online retail, is scheduled for trial in early 2027 .

## Frequently Asked Questions (FAQs)

### 1. What exactly is Amazon accused of doing?

Amazon is accused of manipulating its online advertising auctions. The company publicly promised a "second-price" auction, where the winner would pay a small amount over the runner-up's bid. The FTC and states allege Amazon instead created hidden surcharges and used fake bidders to push the final price up, sometimes charging advertisers their full maximum bid .

### 2. How much money is involved in this case?

The FTC alleges the scheme has illegally extracted more than **$20 billion** from Amazon's advertising customers since 2019 .

### 3. How many advertisers were affected?

More than **1.2 million** advertisers were affected, including over **500,000 small and medium-sized businesses** .

### 4. Who is suing Amazon?

The lawsuit was filed by the Federal Trade Commission (FTC) and a bipartisan coalition of **22 states**, including California, New York, Texas, Florida, Illinois, and Washington .

### 5. What is Amazon's response?

Amazon has strongly denied the allegations. The company argues that its auction model prioritizes ad relevancy, not just the highest bid, and that advertisers have benefited from lower costs and better results under its system .

### 6. What is a "second-price" auction?

In a second-price auction, the winning bidder pays only slightly more than the next-highest bidder, rather than their own maximum bid. This is the type of auction Amazon allegedly promised to advertisers .

## The Bottom Line

The FTC's lawsuit paints a picture of a company that systematically broke its own promises to extract billions from its advertisers. Amazon's defense is that its system is more complex and ultimately fairer than the FTC claims. The case, which could take years to resolve, has already sent a clear message to the market: the scrutiny on big tech's advertising practices is only intensifying.