FTC and 22 States Sue Amazon for Allegedly Inflating Ad Prices by Over $20 Billion

The Federal Trade Commission and a bipartisan coalition of 22 state attorneys general filed a comprehensive lawsuit against Amazon on Monday, accusing the e-commerce titan of systematically and secretly inflating the costs of advertising placements on its retail platform. The legal action, filed in the U.S. District Court for the Western District of Washington, marks a significant escalation in regulatory enforcement against the world's third-largest digital advertising network^[3].

According to the 181-page complaint, the alleged ad-pricing scheme began as early as 2018 and has improperly extracted more than $20 billion from roughly 1.2 million advertisers, more than half of which are small and medium-sized businesses. Regulators assert that the inflated marketing overhead inevitably rippled through retail supply chains, forcing merchants to raise prices on everyday goods ranging from groceries to pharmacy essentials.

The Mechanics of the Secret Surcharge

At the center of the regulatory action are Amazon's primary ad units: Sponsored Products, Sponsored Brands, and Sponsored Display. Amazon long represented to merchants that these placements were sold through generalized second-price auctions. Under standard second-price mechanics, the winning bidder is supposed to pay only a single cent above the second-highest bid, protecting buyers from overpaying if their maximum bid exceeds market clearing rates^[8].

Regulators allege that Amazon quietly circumvented this system beginning in 2019 by introducing undisclosed price floors known internally as soft reserve prices. According to the complaint, these covert pricing mechanisms caused advertisers to pay their full ceiling bid roughly 80 percent of the time rather than the true second-place clearing price.

Amazon has millions of advertising customers who were misled into paying significantly higher prices. These higher costs were largely passed on to American consumers.

Andrew Ferguson, Chairman of the Federal Trade Commission

The lawsuit cites internal documents suggesting that Amazon staff were aware that merchants believed they were bidding in an unmanipulated second-price auction. Regulators highlighted internal communications indicating that employees discussed price increases while privately hoping advertisers would not notice the higher fees and reduce their marketing spend.

State Coalition Escalates Bipartisan Pushback

The regulatory coalition spans a broad ideological spectrum, led by FTC Chairman Andrew Ferguson alongside attorneys general from states including California, New York, Washington, Iowa, New Jersey, and North Carolina. State leaders argue that deceptive ad mechanics act as an invisible tax on Main Street sellers who must buy ad space to remain visible on the marketplace^[7].

State attorneys general emphasized the acute impact on independent retail ecosystems. In filings submitted by Iowa Attorney General Brenna Bird, the state noted that local independent merchants sold more than 14 million items on Amazon last year, generating an average of $315,000 in sales per seller. In New Jersey, Attorney General Jennifer Davenport argued that inflated surcharges on high-volume search terms directly undermined merchant viability.

The states and the FTC are seeking substantial remedies from the federal court, including:

• A permanent injunction prohibiting Amazon from deploying undisclosed pricing floors and deceptive auction rules.
• Disgorgement of ill-gotten gains and restitution for affected business accounts.
• Substantial civil penalties for deceptive trade practices under federal and state consumer protection laws^[3].

Amazon Rebuts Claims and Defends Relevancy Algorithm

Amazon forcefully pushed back against the lawsuit in an extensive public rebuttal, describing the government's action as misguided and claiming the FTC fundamentally misunderstands how modern digital advertising auctions operate. The company contended that advertisers set their bids based on real-world return on ad spend and sales performance rather than theoretical descriptions of auction mathematics^[8].

According to Amazon, its ad auction heavily weights ad relevancy over raw bid value. The retailer claimed that roughly 92 percent of ad impressions are not awarded to the highest cash bidder alone, because showing shoppers products they are actually interested in yields higher conversion rates. Amazon estimated that this relevancy-first approach saved advertisers over $8 billion between 2021 and 2025 compared to a simple highest-bid model.

The company also disputed any assertion of direct consumer injury, maintaining that its average cost-per-click for Sponsored Products remained flat when adjusted for inflation between 2019 and 2024, while conversion rates climbed 24 percent from 2021 to 2025.

Broader Regulatory Pressure on Big Tech Ads

This lawsuit represents the third major federal enforcement action targeting Amazon's core operating practices in recent years. The federal government has steadily tightened its scrutiny across the platform's subscription systems, marketplace dominance, and digital ad infrastructure^[15].

The ad-pricing complaint arrives as federal regulators also scrutinize pricing transparency at Google, underscoring an industry-wide challenge against algorithmic opacity in automated digital ad exchanges. As the litigation moves toward discovery in federal court, the case is poised to test how much transparency digital platforms owe advertisers when configuring automated pricing algorithms.