Alaska joins a suit accusing Amazon of setting the price its ad auctions were meant to discover

Amazon told the businesses buying ads on its site that it ran a second-price auction. Bid what the click is worth to you, the pitch went, and if you win you only pay enough to beat the next-highest bidder. Federal and state regulators say Amazon made itself the next-highest bidder.

A lawsuit filed Monday in federal court in Washington state accuses the company of adding an undisclosed markup to those auctions for more than seven years, overcharging roughly 1.2 million advertising customers. The Federal Trade Commission estimates the practice pulled in tens of billions of dollars. Alaska Acting Attorney General Cori Mills joined the case along with 21 other states.

Instead of using the second-ranked real bid to set the price, the complaint says, Amazon calculated a number of its own and charged that. Internally the company called it a "soft reserve price." The senior vice president running Amazon Ads described the second price in an internal message as one Amazon computes rather than one a bidder submits — a "proxy 2nd price that we calculate."

The effect shows up in how often advertisers ended up paying their maximum. In a working second-price auction, a winner rarely pays the full amount they bid; they pay just above whoever came second. On Sponsored Products, the FTC says, advertisers paid their own full bid 30 to 40 percent of the time in 2021, 70 percent in 2022 and about 80 percent by 2024. The surcharges climbed highest on Prime Day and Black Friday, when advertisers bid hardest.

The FTC dates the practice to 2019 and says it reached more than 500,000 small and medium-sized businesses across Sponsored Products, Sponsored Brands and Sponsored Display ads. The agency says the costs were largely handed on to shoppers.

Mills said Alaska small businesses were among those overpaying for their advertising. The states and the commission want a court order stopping the practices, along with civil penalties, disgorgement of profits and restitution for the businesses. The commissioners voted 2-0 to bring the case.

Amazon has not responded publicly. None of the allegations have been tested in court.