Amazon is facing a major new legal challenge from federal and state regulators who accuse the e-commerce giant of quietly manipulating its online advertising auctions to extract billions of dollars in hidden fees from businesses.
The antitrust lawsuit, filed jointly by the Federal Trade Commission (FTC) and attorneys general from 22 states, alleges that Amazon spent more than seven years covertly increasing the prices that brands and independent sellers paid for visibility on its platform. According to the complaint, the alleged practice impacted more than one million businesses that rely on the marketplace to reach consumers, potentially generating tens of billions of dollars in additional, unauthorized revenue for the tech conglomerate.
The coalition of states joining the FTC in the legal action includes 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.
At the heart of the litigation are Amazon’s core advertising offerings, including Sponsored Products ads, Sponsored Brands ads, and Display ads that appear prominently alongside search results on the platform. For years, the company marketed these auctions to more than 500,000 small and medium-sized businesses as operating on a "second-price" auction model. In a standard second-price auction, the winning advertiser is supposed to pay just one cent more than the next-highest bid, rather than the full maximum amount they were willing to shell out.
Because businesses operated under the assumption that they would only ever pay slightly more than the runner-up, they were heavily incentivized to submit high bids, trusting that the automated marketplace mechanics would naturally keep their actual advertising costs in check. For small-business owners operating on tight profit margins, understanding how these ad auctions functioned was vital to managing marketing budgets in an increasingly crowded online retail ecosystem.
However, the FTC alleges that this transparent marketplace dynamic fundamentally shifted in 2019, when Amazon implemented a surreptitious change without notifying the advertisers participating in the system. According to internal documents cited in the complaint, the company added a hidden surcharge referred to internally as a "soft reserve price." To enforce this artificial price floor, Amazon allegedly utilized what one internal file described as an "invented participant"—essentially a fake, manufactured bidder designed to artificially inflate prices well beyond what true, organic market competition would have produced.
Regulators argue that this mechanism amounted to a sophisticated form of shill bidding. Instead of prices being dictated by real competing merchants fighting for ad placement, Amazon was actively manufacturing a higher benchmark for advertisers to beat. Consequently, the FTC claims that Amazon ended up charging Sponsored Products advertisers their own full winning bid nearly 80% of the time. By frequently forcing advertisers to pay their maximum bid rather than the incremental second-price amount, Amazon effectively transformed what was marketed as a second-price auction into a first-price auction without the knowledge or consent of the participants.
The federal and state complaints assert that Amazon instituted this covert pricing alteration purely out of a desire to boost its advertising revenues. Furthermore, the company allegedly went to great lengths to keep the scheme hidden from merchants, knowing that full disclosure would likely prompt advertisers to lower their individual bids, which in turn would directly cut into the platform’s burgeoning ad revenue streams.
Digital advertising has grown to become one of Amazon’s most lucrative business segments. Last year alone, the company generated more than $68 billion in advertising revenue, cementing its status as a dominant player in the digital ad market alongside other tech giants like Google and Meta. As merchant competition on the platform has intensified over the years, spending on sponsored placements has become an almost unavoidable cost of doing business for third-party sellers looking to maintain visibility among shoppers.
In response to the filing of the lawsuit, Amazon swiftly pushed back against the allegations through a public blog post, describing the FTC’s legal action as "misguided." The company strongly defended its marketplace practices, arguing that the complaint "fundamentally misunderstands how advertisers operate."
Amazon further contended that its automated ad auctions routinely evaluate billions of individual bids across a vast array of different placements and formats, meaning that final prices naturally fluctuate and vary based on real-time market dynamics. The company maintained that advertisers are properly and adequately informed about how its pricing systems operate.
The lawsuit represents the latest escalation in regulatory scrutiny facing Amazon over its business practices, particularly concerning its treatment of the third-party merchants and brands that populate its store. As the legal proceedings unfold in federal court, the case could have significant implications not only for Amazon’s multi-billion-dollar advertising division, but also for how digital ad auctions are regulated and operated across the broader technology and e-commerce industries.
