The U.S. Federal Trade Commission and 22 state attorneys general today sued Amazon.com Inc. over its practices in the online advertising market.

The e-commerce giant pushed back against the complaint in a lengthy statement.

Amazon entered the online advertising market in 2008 with a service called Product Ads. It enabled merchants to promote their products in the search engine built into the company’s e-commerce platform. Today, Amazon is the world’s third-largest online advertising provider behind Google LLC and Meta Platforms Inc.

The FTC lawsuit focuses on three of the company’s advertising offerings. The first, Sponsored Products, enables merchants to run ads for specific items in Amazon search results. The second service is called Sponsored Brands and makes it possible to promote multiple products in a single ad. Lastly, the complaint flags a service called Sponsored Display. It distributes ads across not only Amazon properties but also external websites.

Merchants compete for the company’s ad space through an auction. An auction can be structured in many different ways. According to the FTC, Amazon changed the way its ad auction is structured without notifying merchants. Officials claim that the change and certain related practices cost about 1.2 million U.S. advertisers tens of billions of dollars over the past seven years.

The simplest type of auction is a so-called first-price auction in which the highest bid wins. Online advertising platforms often use a different, more complicated model known as a second-price auction. Under that model, the bidder with the highest offer wins and then pays only slightly more than what the second-highest bidder offered.

The FTC alleges that Amazon initially sold ad space under a second-price auction model and then quietly turned it into a first-price auction. The agency claims that the change was problematic because it made it more difficult for bidders to avoid excessive ad spending.

Auction participants don’t simply try to win the item on offer, but attempt to do so while paying the lowest possible price. The tactics they use to minimize their spending vary based on the auction type. Cost-cutting tactics that work well under one auction model often don’t carry over to others. That’s the reason changing an auction’s structure without notifying participants can cause them to overpay.

The FTC alleges that Amazon made the change around 2019. According to the complaint, the company actively tried to hide the update from ad buyers. Furthermore, the FTC charges that the company uses a so-called soft reserve system to inject bogus bids into ad auctions and thereby artificially increase prices. 

“Amazon has millions of advertising customers who were misled into paying significantly higher prices,” FTC Chair Andrew Ferguson said in a statement. “These higher costs were largely passed on to American consumers.”

Amazon today pushed back against the claims it misled advertisers and raised costs for consumers. According to the company, the average cost-per-click of its Sponsored Products search ads was flat between 2019 and 2024 when adjusting for inflation. Amazon also took issue with several other parts of the lawsuit, notably the allegations about its soft reserve system.

“We’ve provided advertisers with guidance about our auctions and pricing in the main tools they use to manage their campaigns, and we continue to update that guidance,” Amazon stated. “We look forward to making our case in court.”

Photo: Amazon