The United States Federal Trade Commission and 22 states have filed suit against Amazon, alleging the company engaged in deceptive practices that secretly inflated prices in its online search advertising auctions. Amazon responded with a statement that the suit’s claims are based on a misunderstanding of how advertisers adjust bids in response to real-world performance, rather than on descriptions of auction mechanics.
Amazon went on to assert that the FTC wants the public to believe this case is about higher consumer prices, but that premise is false. The company said its pricing approach contradicts any suggestion of consumer harm. Amazon added it provides customers with the lowest prices every day across the widest selection of products, and it works to ensure retail and grocery prices meet or beat those offered by other retailers.
The FTC’s complaint alleges that for more than seven years, Amazon has covertly increased the prices that brands and sellers paid to advertise on its platform, extracting tens of billions of dollars from unwitting advertisers.
The complaint further alleges that Amazon told prospective advertisers that it runs a second-price auction, in which the winner would pay only one cent more than the next-highest bidder for each successful bid on an advertising keyword. In practice, the complaint declared, Amazon has charged its “Sponsored Products” advertisers their own winning bid almost 80% of the time and has effectively converted its second-price auction into a first-price auction.
Amazon has described the second-price auction, as understood by advertisers, as a generalized second-price auction in which they would pay only a cent more than the next-highest bidder, an accepted industry standard for digital advertising placements.
The type of auction matters to advertisers, the FTC insisted, because it impacts how they bid. In a sealed first-price auction for which winners pay the amount of their winning bid, the participating companies run the risk that they might overbid, so, in repetitive auctions for the same goods, they often will reduce bids to determine what the minimum amount needed to win future auctions might be, so-called bid shading.
In second-price auctions, bidders are more likely to bid higher, closer to their true value for the product, because they will only pay the least bid amount needed to win under the auction’s rules. The FTC, in the complaint, asserted that Amazon told advertisers it ran a GSP, but, referencing an internal Amazon document, the auction process had, for years, “a surcharge hidden in it.” The complaint states that, beginning in 2019, Amazon changed its auction rules without notice by adding an undisclosed surcharge, which it referred to internally as a soft reserve price, resulting in advertisers paying substantially more than the price determined by the GSP auction.
In refuting the FTC’s claims, Amazon maintained that since 2006, when ads first appeared in its retail operation, the company has priced clicks using a form of generalized second-price auction, the industry standard that can result in advertisers paying less than their bid. In effect, advertisers who enter a bid would, if they win, pay just enough to beat the next highest-ranked ad, according to Amazon. Auctions took relevance into account to some extent but were much more heavily weighted toward the highest bid.
Yet, rather than favoring this practice, Amazon said in its statement that the company chose to focus on more relevant bids to ensure the best possible outcomes for shoppers and advertisers. As its advanced machine learning-based models are weighted toward relevance rather than the highest bid, winning offers drop significantly. As such, the new approach proved good for advertisers and shoppers but meant premium placements were undervalued, according to Amazon.
As with any retail advertising space, Amazon explained, there is value to specific placements. As relevant ads won more often at prices below market value, the company began testing a concept called soft reserve prices, a real-time minimum value that better reflects what each placement is worth in market terms. The company introduced what it called a hard reserve, a minimum that any bid must surpass to enter an auction. The hard reserve covers Amazon’s costs, whereas soft reserves represent the company’s estimate of the ad placement’s true market value. Amazon added that such reserves are common practice.
Amazon’s current auction process combines considerations of the ads most relevant to the customer and the price an advertiser is willing to pay. So, advertisers bid a maximum price for a placement. When the winning advertiser’s bid exceeds both the hard and soft reserve, they pay the soft reserve, which is less than they were willing to pay, Amazon noted. When the winning advertiser’s bid exceeds the hard reserve but doesn’t meet the soft reserve, Amazon grants the placement to the advertiser and they pay their bid. In no scenario, Amazon emphasized, does an advertiser pay more than their bid.
Amazon said it reviews billions of bids to place ads on its site, then reduces the number to fewer than 1,000 candidates by removing less relevant ads. Then it applies a ranking score to each eligible ad based on relevance and bid. Amazon claimed that, over time, the ranking formula has given greater weight to relevance than to bid amount, with the highest-ranked ad being the one that best balances relevance and bid value.
In 2024, using this approach, about 92% of selected “Sponsored Products” ads were not the highest-bid ads, Amazon said, and the mean winning advertiser’s bid was typically about the 128th-highest bid by amount. In that case, the winning advertisers’ costs were almost always lower than they would have been if ads had been selected on bids alone, according to Amazon.
Amazon went on to say that the FTC claim that the process harmed advertisers because they didn’t understand how the auction worked and therefore overpaid is false. According to Amazon, the company properly describes its pricing and auctions to advertisers, so the FTC claim is based on a fundamental misunderstanding of how advertisers behave. Advertisers adjust bids based on real outcomes, Amazon said, not auction mechanics.
Even accepting the FTC’s premise that advertisers keep their bids constant regardless of ad performance, Amazon estimated that advertisers have saved over $8 billion from 2021 to 2025 as a result of incorporating ad relevance into the auction process rather than selecting ads on bid alone. From 2019 to 2024, Amazon said the average winning bid for “Sponsored Products” search ads fell by 50%, indicating that highly relevant ads were increasingly winning placements at lower bids.
Amazon said no harm to consumers occurred, saying that the FTC’s own complaint cites no evidence of shopper price increases. In more than 150 pages of the complaint, Amazon declared, consumer harm is mentioned only a handful of times and is never substantiated with data. The FTC’s damages model assumes no pass-through to consumers, according to Amazon. Any proposed redress goes to advertisers, not customers, Amazon said, because no consumer harm occurs.
For “Sponsored Products” search ads from 2019 through 2024, the average cost per click for advertisers remained flat when adjusted for inflation, Amazon noted. Advertisers paid the same or less for advertising that delivered increasingly better results, Amazon said in the statement, adding that the FTC cherry-picked a small number of examples, such as a few online educational videos and training content that contained older or simplified examples about how Amazon auctions are run, which the company missed when it audited materials as part of an initial update.
