Consumer protection: FTC, 22 states sue Amazon on ad pricing

The news: On August 31, the Federal Trade Commission and 22 state attorneys general sued Amazon, alleging deceptive and unfair practices that secretly inflated prices in the company’s online search advertising auctions. The complaint says that for more than seven years Amazon covertly raised what over one million brands and sellers had to pay to advertise, and that the scheme likely extracted tens of billions of dollars from advertising customers. The Commission vote authorizing the complaint was 2-0. The allegations are unproven, and a court will decide the case.

Why it matters: The charges may sit on the business side of the platform, but the FTC argues the effects reach shoppers. Chairman Andrew Ferguson said the higher advertising costs were “largely passed on to American consumers.” Sellers who pay more to be seen on Amazon have to recover that cost somewhere, and the price on the product page is the obvious place.

The complaint centers on how the auctions were described. Amazon told advertisers it ran “second price” auctions in which a winner pays one cent more than the next highest bidder. The FTC alleges that beginning in 2019 Amazon quietly added an undisclosed surcharge, referred to internally as a “soft reserve price,” so that Sponsored Products advertisers paid their own winning bid close to 80% of the time.

By the numbers:

• 22 states joined the FTC
• Over 7 years: how long the complaint says the practice ran
• More than 1 million brands and sellers, including over 500,000 small and medium-sized businesses, named as affected advertising customers
• 30% to 40% in 2021, 70% in 2022, about 80% in 2024: the share of the time, per the complaint, that Sponsored Products advertisers paid their own bid

The big picture: The FTC says advertisers who believed in a true second-price auction bid higher than they otherwise would have, because they expected to pay only the minimum needed to win. The FTC cites internal Amazon documents describing a “surcharge hidden in it” and says Amazon acknowledged using an “invented auction participant” to raise prices. It alleges the increases were larger on high-volume days such as Prime Day and Black Friday and were ramped up beforehand to disguise the inflation. It also alleges Amazon gave misleading answers to advertisers who asked whether the auction format had changed.

The states in the suit are 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.

What’s next: The court will decide the claims. The case is a reminder that pricing disputes between platforms and sellers can end up in what consumers pay.