The FTC vs Amazon: Ad Auctions and Unpredictable Reserve Prices
Nobody can predict Amazon’s ad reserve prices, including Amazon. That is the defence.
Background
The Federal Trade Commission (FTC) and 22 states sued Amazon on August 31st over its Sponsored Ads auctions, alleging more than $20 billion in additional advertising costs since 2019. Amazon responded with a detailed rebuttal, highlighting outcome data as its strongest defence, which concedes that reserve prices are not predictable by anyone, even Amazon itself, in its $68.6 billion advertising business.
Key Claims
FTC: Alleges Amazon misdescribed auction rules to advertisers, charging them their full bid instead of the second-price amount around 80% of the time.
Amazon: Defends by showcasing outcomes, stating that average cost-per-click remained flat (adjusted for inflation), conversion rates increased by over 24%, and average winning bids decreased by 50%.
Understanding the Mechanism
Amazon explains a two-tiered system:
- Hard Reserve: The minimum bid required to enter the auction, covering costs.
- Soft Reserve: A real-time estimate of the actual value of the placement.
When a winning bid exceeds both reserves, the advertiser pays the soft reserve. If it clears the hard reserve but not the soft one, they win and pay their own bid, aligning with second-price auction dynamics without exceeding maximum bids.
The Striking Statement
In its rebuttal, Amazon states that "reserves are determined in real time and are not predictable in advance by anyone, including Amazon or the advertiser." This is presented as a reason why disclosure wouldn’t have made a difference, implying that advertisers could not have acted upon it. However, this also highlights the unpredictability of reserve prices within a massive advertising business.
Conclusion (in the original text’s words)
Remember that in today’s digital era, where businesses like Amazon dominate the market, the interplay between transparency, pricing mechanisms, and consumer protection is complex. As this case unfolds, it will be crucial to consider the long-term implications for both advertisers and consumers alike.