FTC Claims Amazon Creates Defect Ads and Uses Secret Algorithm To Control Pricing

Amazon has been accused by the Federal Trade Commission (FTC) of flooding its search results with irrelevant “defect” ads, under the direction of its founder, Jeff Bezos. This alleged action served to increase Amazon’s profits by directing consumers to more expensive items.

The accusations emerged as part of an ongoing antitrust lawsuit against Amazon, led by the FTC and 17 states. Initially filed in late September, the lawsuit claims that Amazon has abused its monopoly power to raise prices across the internet, to the detriment of the overall shopping experience and in exclusion of competitors.

Details of these accusations became public in a less-redacted version of the complaint released by the FTC. According to the document, Jeff Bezos instructed his executives to “accept more defects,” referring to the increased quantity of advertisements shown. This strategy was designed to inflate Amazon’s ad revenues. The term “defect ads” refers to those that are tangential or entirely unrelated to the user’s search.

Amazon has been operating an ad service on its platform for over 10 years, where brands and sellers can bid for prominent placement in search results, aiming to make their products more noticeable among the competition. This service has helped Amazon’s profits soar, becoming one of the company’s most lucrative business segments.

In 2018, Amazon surpassed Microsoft to become the third-largest advertising platform in the U.S., behind only Google and Facebook. Recently, in 2022, Amazon started disclosing advertising revenue in its quarterly earnings reports, revealing the true size of this business segment. Last month, Amazon reported that its advertising business generated over $12 billion in the third quarter.

In response to the allegations, Amazon’s General Counsel David Zapolsky defended the company’s actions, stating that the initial complaint was “wrong on the facts and the law.” He argued that the activities challenged by the FTC spurred competition and innovation in the retail industry and have “produced greater selection, lower prices, and faster delivery speeds for Amazon customers and greater opportunity for the many businesses that sell in Amazon’s store.”

Implications of Amazon’s Defect Ads

The newly revised complaint against Amazon alleges that its ad strategy degraded the user experience by crowding out relevant search results with excessive “junk” ads. This led to consumers seeing products that were irrelevant to their searches. One notable instance included “buck urine” showing up as the first hit in a water bottle search.

Amazon considered implementing controls over ad relevance, but senior executives decided against such constraints. The company found that these defect ads did not negatively affect its advertising revenue or profits and even incorporated a “cost of defect” into its ad auction system for maximum profit.

The FTC alleges that Amazon’s ad strategy not only degraded the shopping experience but also increased costs for third-party sellers, a cost likely passed on to customers through higher prices.

Amazon FTC Debacle Reveals Secret Project to Unfairly Raise Prices

The FTC is also accusing Amazon of using a secret algorithm to control pricing, claiming that the e-commerce giant has generated over $1 billion in extra profit because of it. According to Reuters, “The FTC said Amazon created a ‘secret algorithm internally codenamed ‘Project Nessie’ to identify specific products for which it predicts other online stores will follow Amazon’s price increases.’”

New revelations from the FTC’s lawsuit against Amazon allege that the company used a covert algorithm to inflate prices on competitor platforms and systematically erased over two years’ worth of internal communications.

Amazon allegedly leveraged a feature on the messaging app Signal to make these internal messages disappear, defying FTC instructions to preserve all relevant communications during the ongoing investigation. These latest allegations intensify the scrutiny of Amazon’s business practices amidst its ongoing antitrust lawsuit.

According to AP News, the FTC’s excerpts state that Project Nessie “has been used by Amazon to pinpoint products that will allow it to rake in more cash. The company used it to predict where it can raise prices and have other shopping sites follow suit. Amazon activated the algorithm to raise prices on some products, and when other sites followed its lead, it kept the elevated prices in place, the agency said.” The FTC also claims that Amazon has turned Project Nessie on and off many times since it was deployed in 2014.