FTC claims Amazon made $1bn with secret pricing algorithm

Amazon made more than $1bn extra profit using a secret pricing algorithm, US antitrust regulators claim in a lawsuit accusing Amazon of abusing its monopoly to harm both consumers and sellers.

On Thursday, previously redacted portions from the Federal Trade Commission Complaint that was filed in September revealed new details. These included how Amazon used an algorithm internally known as “Project Nessie”, to raise prices on its platform.

The regulator said that the model identified products for which online stores would attempt to match Amazon prices. The algorithm, when activated, would increase the prices of those products and maintain those prices even if other platforms followed suit.

The FTC accused Amazon as well of strategically deactivating its algorithm. The FTC stated that Amazon, aware of the potential public backlash it could cause, has switched Project Nessie on and off when there is heightened scrutiny.

According to the FTC complaint, as consumer spending decreased and inflation increased last year, Doug Herrington asked whether he could turn on “[o]ur friend Nessie with perhaps some new targeting logic”, to increase retail profits.

Amazon’s Tim Doyle said that the FTC complaint “grossly mischaracterizes the Project Nessie” tool. The algorithm was designed to prevent prices from becoming “so cheap that they would be unsustainable”. The algorithm was discarded “several year ago”, he said.

In the original lawsuit, Amazon was accused of punishing sellers who offered lower prices than its own and forcing them to use their “costly” logistic network while “steering” shoppers towards more expensive products. This landmark case is one of the most prominent challenges Joe Biden’s Administration has made against Big Tech and its market power. It also represents a test for FTC Chair Lina Khan’s expansive theory on antitrust enforcement.

Amazon’s advertising business was also revealed on Thursday. According to the FTC’s report, Jeff Bezos, Amazon founder, directed his executives to increase the number of “pay-to-play advertisements” on Amazon.com, which would allow merchants to appear higher in search results. This included “irrelevant ads” internally referred to as “defects”.

Amazon executives admitted to the FTC that their practice caused “harm” to consumers by making search results less relevant. Bezos told his staff to “accept even more defects” so that the company could make more money through advertising, according to the complaint.

According to the complaint, an Amazon executive provided examples of harmful and “bizarre”, sometimes even “bizarre”, results of this advertising strategy. For example, “buck urine appeared in the first Sponsored Product slot for “water bottles””, the complaint stated.

According to the FTC, Amazon generated $1bn in revenue from advertising in the US for 2015. Advertising sales at high margins have risen to $37.8bn in 2022.

Amazon’s Doyle stated that the company “works to make it easy for customers to locate the products they want” and claimed the claim made by leadership telling employees to accept even more defects is “grossly inaccurate and taken out-of-context.”

The FTC also claimed that Amazon employees acknowledged the dangers of not forcing sellers to use their logistics and delivery services.

In the complaint filed on Thursday, a senior Amazon executive admitted to colleagues that he experienced an “oh crap” moment when he realized a softer approach toward sellers would “fundamentally (weaken Amazon’s) competitive advantage in America”. Vendors would be able to “run their warehouses” and make inventory available on other platforms that was otherwise only “available to our customers”.