There’s something strange about the FTC’s allegations against Amazon Ads that I don’t think has received enough attention.
Amazon told advertisers it was running a second-price auction. The FTC alleges that Amazon gradually changed the mechanics so that, much of the time, advertisers were effectively paying their own bid—the outcome you would expect from a first-price auction.
Amazon denies the allegations.
But here’s the part I find particularly interesting: there is nothing inherently wrong with running a first-price auction.
In fact, most of the display advertising ecosystem moved from second-price to first-price auctions years ago.
So the important question isn’t simply whether Amazon’s auction behaved more like a first-price auction.
It’s this:
If Amazon wanted the economics of a first-price auction, why didn’t it just tell advertisers it was running one?
That turns this from a technical argument about auction mechanics into something much more important: a question of trust.
If you need a refresher on first-price versus second-price auctions, I’ll link to a video where I explain the difference in more detail.
But the short version is that second-price auctions have traditionally been attractive because they encourage buyers to bid closer to their true value rather than trying to guess exactly what they need to pay to win.
In the early days of programmatic display advertising, independent ad exchanges and SSPs (Supply-Side Platforms) used second-price auctions. However, the rise of header bidding—where publishers auctioned a single impression across multiple exchanges simultaneously—broke the traditional second-price mechanism. It created “multi-auction” chaos, fee stripping, and hidden arbitrage (often called “match-rate arbitrage” or “bid caching”).
In my opinion the main two problems were that
- The ecosystem of intermediaries buying became so complicated that with all the hops from one buyer to the next a second price auction doesn’t work
- A profound lack of trust that anyone was actually running a true second price auction, which is the theme I will return to when as talk about Amazon.
Because Amazon told advertisers it ran a second-price auction: ads rank on a blend of bid and relevance, and the winner pays a penny more than the next-ranked bidder. The FTC complaint alleges that from 2018 or 2019, Amazon began implementing undisclosed reserve prices. This raised what winners actually paid. By 2024, Sponsored Products advertisers were being charged their own full winning bid close to 80% of the time. The FTC describes this as converting a nominally second-price auction into a first-price one, and puts the figure extracted at over $20bn.
This covers the prominent keyword and search-adjacent auction formats—including Sponsored Products, Sponsored Brands, and Display Ads tied to those search queries.
The timing here is what makes this whole story so fascinating. I was actually at Yahoo when we made the decision to transition our display exchange to first-price auctions in 2019. That followed Microsoft—via Xandr—moving in 2017, and independent players like OpenX, Magnite, and Index Exchange leading the charge right before us. The definitive turning point came when Google Ad Manager made the switch in 2019. By the end of that year, the entire open web had effectively modernized and left second-price auctions behind.
In other words, the vast majority of the industry moved to a first priced auction by the end of 2019.
But, Amazon chose to stay with second priced auctions at that time.
When you look at the Amazon FTC lawsuit through this lens, it highlights a stark irony: While the open web was forced to modernize, clean up its auction plumbing, and adopt radical first-price transparency around 2019, Amazon was allegedly moving in the exact opposite direction—secretly engineering a pseudo-first-price mechanism behind a second-price marketing promise years after the rest of the ad tech industry had already moved on.
Another thing that isn’t talked about much is the first companies that moved to first priced saw a revenue benefit. That is because the bidders hadn’t really adapted to needing to shade the bid down, so many of the bidders continued to bid into the first-priced auctions at inflated prices, which benefited those that moved early.
So Amazon missed some of the economic upside that early movers got from switching to first-price auctions.
Were there still legitimate reasons to stay with second-price? Certainly. Second-price auctions have real theoretical advantages, particularly around encouraging buyers to bid closer to their true value.
But by 2019, first-price auctions were no longer unusual or controversial in digital advertising. They had become the industry norm.
Which makes the Amazon situation more puzzling.
If Amazon wanted the economics of a first-price auction, there was an obvious path available: openly move to first-price, explain the change to advertisers, and let buyers adjust their bidding behavior accordingly.
Implications:
Some people I talked to say it was just proof that the big guys try to live by their own rules, but what are the implications for the broader industry.
The first thing to think about is who is still running a second-priced auction and who is going to be under pressure to move to first-priced.
The answer is that a number of the Retail Media Networks are running second-priced auctions for their Sponsored Product listing.
I expect they will be scrambling around right now trying to work out exactly what they say, whether they comply with what they say and whether they should change their auction mechanics. Every RMN still describing its Sponsored Products marketplace as second-price should now be asking something like:
- What do we tell buyers the auction does?
- What does it actually do?
- How are reserve prices used?
- Under what circumstances does the winner pay its own bid?
- And who approves changes to those mechanics?
I don’t think either Google or Bing will see this as a sign that they need to change because their Search marketplace dynamics are very different.
Where it gets interesting is some of the new participants. What are AI ads going to do? They have tried to model Google Search, so defaulted to second-priced, but many of them will have buyers from the Display ecosystem, so may feel many of the same pressures.
Unfortunately, I don’t think enough market participants will look at this FTC action and see it as a sign they need to check that their own houses are in order.