The FTC says Amazon hid a surcharge in its ad auctions, and winners paid their own bid 80% of the time

The FTC sued Amazon on August 31 over how it prices search ads. Twenty-two state attorneys general signed on. The complaint’s central claim is mechanical: Amazon told advertisers it ran a second-price auction, then replaced the price that auction produced with a higher one it calculated itself.

Auction format sounds like accounting trivia. It decides how a rational bidder bids. A buyer who expects to pay the runner-up’s price will bid its true ceiling. A buyer who knows it pays its own number bids low and creeps upward. The FTC alleges Amazon kept roughly 1.2 million advertising customers in the first mindset while billing them under the second, and puts the total at more than 20 billion dollars. Amazon says the theory misreads how advertisers behave.

How the auction is meant to clear

Amazon’s Sponsored Products ads are priced per click. An advertiser sets a maximum bid for a keyword, Amazon ranks eligible ads by a blend of bid and predicted relevance, and the top-ranked ad takes the slot. What the winner pays is the interesting part. In a generalized second-price auction, the winner pays the smallest amount that would still have beaten the runner-up, which Amazon described for years as “one cent more than the next highest bidder”.

That rule exists for a reason. William Vickrey worked it out in a 1961 paper in the Journal of Finance, cited in the complaint: when the winner pays the runner-up’s price, the safe strategy is bidding exactly what the slot is worth. Overbidding gains nothing and underbidding only loses auctions. Amazon’s own documents call the property “incentive compatible,” noting that bidders “can achieve the best outcome to themselves just by” naming their true value.

Flip to a first-price auction and the strategy inverts. Now the winner pays its own number, so every win raises the question of how much money was left on the table. Buyers answer with bid shading: drop the bid a little, see whether it still wins, drop again. It’s a slow search for the floor, and it’s the work every buyer on Google’s exchange had to take on when Google Ad Manager moved to first-price pricing in 2019.

Where the hidden surcharge sits

The complaint puts the surcharge in a precise spot: after the auction clears, before the invoice. In the words of one internal Amazon document the agency quotes, the auction pricing had “a surcharge hidden in it”. Internal Amazon documents describe that pricing in two stages. Stage one runs the generalized second-price auction and produces a figure the documents call the “GSP CPC.” Stage two “transforms the GSP CPC to the final CPC” by applying what Amazon internally named a soft reserve price, according to the filed complaint.

The name is borrowed and misleading. A reserve price in a normal auction is a floor announced before bidding starts, the minimum a seller will accept. Amazon’s version arrives afterward. Its own Sponsored Products team called the practice “post-hoc pricing adjustments” with “an element of unfairness” since advertisers “may not be expecting” them.

There’s a ceiling on the markup, and that ceiling carries most of Amazon’s public defense. The soft reserve never exceeds the winner’s own bid, so Amazon can say that “in no scenario does an advertiser pay more than their bid”. That’s true, and it sidesteps what the FTC is arguing. The clearing price of a working second-price auction usually sits well below the winning bid. Pushing it up to the bid, over and over, is how a second-price auction quietly becomes a first-price one.

The FTC’s numbers on that conversion are the spine of the case. The share of Sponsored Products clicks priced at the advertiser’s own bid ran between 30% and 40% in 2021, hit 70% in 2022 after Amazon rolled out a pricing model keyed to predicted sales, and reached roughly 80% in 2024, the agency says. The senior vice president running Amazon Ads put it plainly in an internal message the complaint quotes: “the second price isn’t set by an actual bidder, but rather by” Amazon, in the form of a “proxy 2nd price that we calculate.”

Why the numbers looked normal

Advertisers had no per-click view to check against. Amazon’s reporting shows averages that combine many keyword auctions across multiple placement types, and its invoices aren’t itemized by click. The complaint quotes Amazon acknowledging internally that advertisers can’t “see performance results (CPC, original bids, etc.) at the per ‘click’ level” and so lack “visibility into the behavior of individual auctions.”

Which leaves a buyer holding one aggregate cost-per-click number that drifts upward, and an obvious story for why: competitors are bidding more. A Sponsored Products team member wrote in a 2022 internal chat that “advertisers don’t see the surcharge over GSP” and that they would read price increases as competition, adding that the assumption “also helps with external communication.”

Prime Day 2023 is where the seam showed. Surcharges more than doubled cost-per-click during the event, several large customers complained, and Amazon told them higher shopper activity was the cause, according to the complaint. The company then added internal “surcharge alarms” and caps to stop what it called “egregious CPC increases” during peak events, then began phasing later increases in gradually so the jumps would be harder to notice.

Amazon’s rebuttal attacks the harm rather than the mechanism. Average Sponsored Products cost-per-click was flat from 2019 through 2024 once adjusted for inflation, conversion rates rose more than 24% between 2021 and 2025, average winning bids fell 50% from 2019 to 2025, and roughly 92% of selected Sponsored Products ads in 2024 weren’t the highest bid, the company wrote. Its argument is that relevance-weighted ranking already saved advertisers more than 8 billion dollars over that period. FTC Chairman Andrew Ferguson pushed the other way in the announcement, saying the “higher costs were largely passed on to American consumers”; Amazon’s response counters that the complaint “cites no evidence of consumer price increases.”

Which advertisers are most exposed

The complaint counts roughly 1.2 million U.S. advertising customers, more than 500,000 of them small and medium-size businesses. Those are the accounts least likely to run their own bidding logic. A seller who sets a manual maximum bid in the ad console and leaves it alone has no mechanism for shading, so an inflated clearing price passes straight through into spend.

Agencies and large brands sit differently. They run algorithmic bidders that optimize against return on ad spend, so a rising cost-per-click eventually drags their bids down whether or not anyone understands why. That’s close to Amazon’s own argument, which is that advertisers “adjust bids based on real-world performance, not descriptions of auction mechanics.” The counterpoint in the complaint is that Amazon watched for exactly that reaction: a 2023 experiment raised surcharge limits on U.S. traffic, advertisers didn’t cut bids or budgets, and the increase shipped nationwide.

Ad format matters too. Sponsored Brands looks worse on one axis, with the FTC alleging Amazon sets the price on 70% of those clicks and charges the winner its own bid half the time. Sponsored Display is named as well. Peak shopping days carry the largest surcharges, so any budget that concentrates around Prime Day or Black Friday absorbed more of them.

None of this is a problem unique to Amazon. Auction opacity is the long-running fight across adtech, which is why Google published a blog post before flipping Ad Manager to first-price and why Brussels keeps fining gatekeepers over how their systems rank and price. The real-time bidding stack has the same structural flaw: only the auctioneer sees the bid stream, and the auctioneer is also the seller. Amazon’s ad business passed 68 billion dollars in revenue in 2025, which is roughly the scale at which a rounding difference per click stops being a rounding difference. Anyone watching OpenAI build an ad business inside ChatGPT should read this complaint as the template for the disclosure questions that arrive next.

What this means for you

If you buy Amazon search ads, there’s a check worth running this week. Pull per-keyword data and compare your average cost-per-click against the maximum bid you set. Where the two sit on top of each other across a large number of clicks, you’re effectively paying first-price whatever the auction is called, and the manual-bid habits that make sense under second-price rules stop applying. Bid shading is the standard answer, and it has a cost of its own: shade too hard and you lose impressions you wanted.

Nothing here is settled. This is a complaint, filed August 31 in the U.S. District Court for the Western District of Washington, and Amazon hasn’t answered it. The Commission vote authorizing the filing was 2-0, per the FTC. Several of the sharpest figures in the public version are redacted, including the average surcharge rate and the peak-day multiplier, so the 20-billion-dollar estimate rests on internal documents nobody outside the case has read. Watch for the unredacted filing and for Amazon’s first substantive response. Those two documents will say more about the mechanics than the coverage will.