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 dierent 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 oers that can be accepted from any one class|discriminates simply and eectively. The quota increases demand scarcity from the perspective of low- cost sellers, which causes them to lower their oers. To solve for approximate equilibrium strategies of asymmetric auctions with and without a quota, we develop a new method that is similar but distinctly dierent from the constrained strategic equilibrium (CSE) approach [2]. The new method nds the constrained strategies that minimize the expected gain from a randomly chosen seller unilaterally deviating from the constrained strategy. We nd quota can enhance competition and lower total procurement cost. We subject the same auctions to laboratory testing and nd savings from quota in excess of that predicted by the approximate equilibrium strategies. This study is rst 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 ndings 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.