In classical auction theory with an exogenously fixed number of bidders, auctioneers maximize revenue by running a second-price auction with an appropriately chosen reserve price. Variants of this auction format are widely adopted by online auction platforms. However, empirical evidence shows that when buyer entry is endogenous, sellers tend to refrain from setting high starting prices to preserve participation. Recently, guarantee-price auctions that maintain both sides' participation have been successfully adopted by a large online auction platform, in which the platform commits to a minimum payment to the seller regardless of the auction outcome. However, the economic logic underlying this new auction format remains unclear. In this paper, we characterize the platform's optimal guarantee-pricing strategy, identify the conditions under which such a mechanism is profitable, and clarify the trade-offs involved in its adoption. We find that when the seller's entry cost is relatively low, starting-price auctions are more profitable for the platform. For intermediate entry costs, the seller does not enter under starting-price auctions, and the platform prefers the guarantee-price auction. When the seller's entry cost is sufficiently high, the platform cannot earn a profit under either auction format. From the users' perspective, buyers always weakly prefer guarantee-price auctions, while sellers weakly prefer starting-price auctions. Furthermore, we study a hybrid mechanism in which the platform both allows sellers to set a starting price and offers a guarantee. We show that the hybrid mechanism Pareto dominates either single-instrument format, as it allows the platform to flexibly deploy the most effective instrument across different market conditions. Our results provide actionable managerial insights for platform operators on when and why guaranteed price mechanisms should be implemented, with implications for both established and emerging marketplaces.
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