Using Quotas to Enhance Competition in Asymmetric Auctions: A Comparison of Theoretical and Experimental Outcomes

We study multiple-unit asymmetric procurement auctions wherein sellers from two classes draw costs from different distributions. When sellers are asymmetric, a cost-minimizing buyer discriminates among classes of sellers to enhance competition [1]. Establishing a quota—a limit on the number of offers that can be accepted from any one class—discriminates simply and effectively. The quota increases demand scarcity from the perspective of lowcost sellers, which causes them to lower their offers. To solve for approximate equilibrium strategies of asymmetric auctions with and without a quota, we develop a new method that is similar but distinctly different from the constrained strategic equilibrium (CSE) approach [2]. The new method finds the constrained strategies that minimize the expected gain from a randomly chosen seller unilaterally deviating from the constrained strategy. We find quota can enhance competition and lower total procurement cost. We subject the same auctions to laboratory testing and find savings from quota in excess of that predicted by the approximate equilibrium strategies. This study is first to combine theory and experimental evidence of auctions with quotas, though similar mechanisms are widely used in practice. Because the mechanism is widely used to promote social goals and can also lead to better outcomes for the buyer, our findings have both positive and normative implications. One potentially interesting application of quota auctions would be for large-scale procurement of ecosystem services like carbon sequestration.