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TRENTON – Today, Attorney General Jennifer Davenport and the Division of Consumer Affairs (DCA) joined the Federal Trade Commission (FTC) and a bipartisan coalition of 21 other states in a lawsuit against Amazon alleging that, for over seven years, the e-commerce tech giant secretly and systematically overcharged its advertisers, including over 500,000 small- and medium-sized businesses by rigging the auctions it uses to set the price of advertising products on its platform.

The complaint details internal documents and conversations, alleging that Amazon concealed hidden surcharges from unwitting advertisers for years, extracting tens of billions of dollars from these businesses. Because Amazon controlled both the auction and the limited pricing data available, business customers had no way to verify whether they were being charged a fair, competitive price, and in many instances ended up paying substantially more than anticipated.

"For years, Amazon has been misrepresenting how it sets the prices to advertise on the most coveted real estate on its website,” said Attorney General Davenport. “It promised competitive auctions to set prices and then quietly replaced those results with inflated prices designed to pad its own profits. And it applied those secret upcharges to advertisements for essentials like food, grocery, and pharmacy products, which translate to higher prices for New Jersey consumers. Today’s lawsuit shows that we are standing up for Main Street businesses and consumers over billionaires that use their dominance in the market to worsen the affordability crisis for everyone.”

"Honest auction markets depend on trust, fair competition, and transparent dealing," said DCA Acting Director Christopher Peterson. “New Jersey businesses competing for space to advertise on Amazon have been systemically cheated. We are taking action to hold Amazon accountable and to protect the small and medium-sized businesses that power our economy."

Second Price Auctions

In these advertising auctions, prospective advertisers bid to place Sponsored Product ads, Sponsored Brands ads and Display Ads alongside the results that appear when a consumer searches for a product using a keyword on Amazon’s store. Placements are auctioned to the highest-ranked bidder for each keyword.

As described in the complaint, Amazon has represented to prospective advertisers for years that Amazon runs “second price” auctions where the winner of the auction would only pay “one cent more than the next highest bidder” for each successful bid for an advertising keyword. However, in practice, the complaint alleges that Amazon has charged its Sponsored Products advertisers their own winning bid close to 80% of the time and has effectively converted its nominally “second price” auction into a first price auction.

According to the complaint, Amazon’s “second price” auctions have been described by Amazon, and understood by advertisers, to be run as generalized second-price, or GSP auctions, which have been the accepted industry standard for digital advertising placements.

The complaint states that Amazon has made these or similar representations on its website, in training videos and in other public-facing materials, as well as in presentations made to advertisers by its hundreds of sales personnel.

The type of auction matters to advertisers because it impacts how they bid. In a sealed first-price auction—the type of auction where winners pay the amount of their winning bid—bidders run the risk that they might overbid. So, in repetitive auctions for the same goods, they will often reduce their bid to determine what the minimum amount needed to win future auctions might be. This is called bid shading.

In second-price auctions, bidders are more likely to bid higher, closer to their true value for the product, because they will only be liable to pay the least bid amount needed to win under the auction’s rules.

Hidden Surcharges

As alleged in the complaint, Amazon told advertisers it ran a GSP, but for years its auction pricing had “a surcharge hidden in it,” in the words of one internal Amazon document. The complaint alleges that, beginning in 2019, Amazon changed its auction rules without notice by adding an undisclosed surcharge that Amazon referred to internally as a “soft reserve price.” This resulted in advertisers paying substantially more than the price determined by the GSP auction.

According to the complaint, Amazon made this surreptitious change to its auction because it was unhappy about how much revenue its advertising auctions were generating. The complaint quotes from the executive in charge of Amazon Ads who explained internally that the price paid by advertisers “isn’t set by an actual bidder,” but is instead a “proxy 2nd price that we calculate.” In another document quoted in the complaint, Amazon acknowledged it uses an “invented auction participant” to increase prices. The complaint alleges that Amazon’s “invented auction participant” and its hidden “proxy 2nd price” bids are essentially shill bids. The complaint also quotes from another Amazon employee, who stated that Amazon’s surcharges enable it to obtain prices “beyond what [can] be achieved through advertiser competition.”

The complaint alleges that Amazon’s unlawful scheme has generated tens of billions of dollars of revenue for the company by, for example, substantially increasing the prices charged to advertisers on ordinary shopping days and applying far greater increases to prices on high-volume shopping days like Prime Day and Black Friday. The complaint quotes notes from a 2024 discussion between senior executives, including the head of Amazon Ads and Amazon’s Chief Digital Economist, where it was acknowledged that Amazon’s “clever non-transparent way to charge first price” has been an “incredibly effective way to drive revenue.”

Amazon Conceals Surcharge Pricing System

As described in the complaint, because Amazon understood that revealing the surcharges—and the fact that the auction was no longer a genuine second-price auction—would lead to significant backlash from its advertising customers, Amazon spent years concealing the changes from the public. For example, leading up to the high-volume days, Amazon carefully ramps up surcharges to disguise the fact that it is inflating prices. Amazon has repeatedly deployed such underhanded tactics to increase its surcharges to meet revenue targets.

Amazon knows that it benefits from its advertisers’ false belief that the prices they pay are set by fair, competitive second-price auctions, according to the complaint. The complaint quotes from Amazon employees acknowledging that advertisers “are operating under the assumption that Amazon uses a GSP auction,” that advertisers “believe Amazon will not simply charge their first price,” and that as a result “many advertisers bid far higher than what they are willing to pay … because they assume [the auction is] a GSP.”

According to the complaint, the truth is that advertisers have not been competing in fair GSP auctions. The complaint alleges that, over the past several years, Amazon’s surcharges have resulted in advertisers paying their own bid amount an increasingly high amount of the time. For Sponsored Products ads, the complaint alleges that the percentage of the time advertisers paid the amount of their bid increased from between 30% and 40% in 2021, to 70% in 2022, and to approximately 80% in 2024 as a result of the surcharges. But Amazon has actively concealed this fact from advertisers to prevent them from lowering their bids, according to the complaint.

The complaint alleges that Amazon and its senior executives took active steps to conceal its surcharge pricing system from its advertisers, including giving false and misleading answers to advertisers who asked the company directly if it had changed its auction format, so that they would continue to be deceived about how the prices they pay are set. The complaint quotes from Amazon’s internal documents, stating that revealing the surcharges would result in “irrevocable damage to advertiser trust” and a “downward spiral” of advertisers lowering their bids, leading to dramatic losses of revenue for Amazon.

According to the complaint, Amazon has continually tested and monitored its customers to increase its prices without getting caught, and, to date, this scheme has been successful. The complaint quotes from one Amazon employee who said that the company’s hidden surcharges are “good for Amazon” because “advertisers must pay more for the same advertising,” and “the benefit to Amazon comes at the cost of advertisers.”

Attorney General Davenport and DCA allege that this conduct violates the Consumer Fraud Act’s prohibitions against deceptive, unconscionable and abusive commercial practices, N.J.S.A. 56:8-1 et seq. The FTC brings this action for violations of Section 5(a) of the FTC Act, including misrepresentation, deceptive auction manipulation, concealment, unfair omissions, and unfair billing practices.

Attorney General Davenport and DCA are represented in this matter by Deputy Attorneys General Conor C. Vance and Zeyad A. Assaf, under the supervision of Consumer Fraud Prosecution Section Assistant Section Chief Monisha A. Kumar, Section Chief Jesse J. Sierant, and Assistant Attorney General Janine N. Matton.

In addition to Attorney General Davenport, the attorneys general of Alaska, Arizona, California, Colorado, Florida, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Nebraska, New York, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Vermont, and Washington also joined this lawsuit.