The Ad Auction Trap: FTC Sues Amazon Over Undisclosed Surcharge Tactics

Amazon faces a major lawsuit filed by the Federal Trade Commission and 22 states, accusing the retail giant of secretly overcharging businesses for product advertising across its platform.

The legal complaint alleges that Amazon spent over seven years quietly raising ad prices through hidden auction surcharges. According to regulators, the practice affected more than one million brands and third-party sellers, generating tens of billions of dollars in extra ad revenue for Amazon.

Twenty-two states joined the FTC in the legal action, including 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.

The core dispute centers on Amazon’s Sponsored Products ads, Sponsored Brands ads, and Display ads displayed alongside regular search results. Historically, Amazon pitch decks told over 500,000 small and medium-sized businesses that its ad space ran on a standard second-price auction. In a classic second-price format, the winning seller pays just one cent more than the second-highest bid rather than paying their full maximum offer. This design encourages sellers to submit true maximum bids while relying on system checks to keep final costs fair.

However, the complaint alleges that Amazon introduced unannounced changes starting in 2019. Instead of charging standard second-place rates, Amazon added hidden price floors. Internal documents quoted in the lawsuit show company insiders referring to the tactic as a soft reserve price or an invented auction participant, effectively introducing fake automated bids to force winning costs higher.

Regulators argue these artificial surcharges functioned like shill bids. Instead of letting natural market competition establish ad rates, Amazon’s algorithm forced winning advertisers to pay near their maximum bid cap roughly 80 percent of the time. This shift effectively converted a promised second-price auction into a first-price model without updating advertisers.

The FTC claims Amazon concealed these pricing tweaks to prevent sellers from lowering their maximum bids, protecting a corporate ad division that brought in over $68 billion last year.

In an official blog response, Amazon labeled the FTC action misguided, stating that the complaint misunderstands basic auction dynamics and ad operations. Amazon stated that real-world auction bids adjust based on sales conversion performance and that ad prices fluctuate naturally across placements without harming merchant margins.

When platform operators control both the marketplace search pages and the backend ad auctions, merchants face steep competition to maintain product visibility. Undisclosed pricing adjustments directly increase selling costs, forcing small merchants to absorb lower profit margins or raise retail prices for daily consumer goods.

This legal battle emphasizes rising scrutiny around digital ad transparency. As regulators challenge hidden platform fees, big tech firms face growing pressure to open up algorithmic pricing details to public review.