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

Daniel Hellersteina (), Nathaniel Higginsa () and Michael Roberts
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Daniel Hellersteina: USDA Economic Research Service
Nathaniel Higginsa: USDA Economic Research Service
Authors registered in the RePEc Author Service: Daniel M. Hellerstein

No 201409, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: We study multiple-unit asymmetric procurement auctions wherein sellers from two classes draw costs from di erent 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 o ers that can be accepted from any one class|discriminates simply and e ectively. The quota increases demand scarcity from the perspective of low- cost sellers, which causes them to lower their o ers. To solve for approximate equilibrium strategies of asymmetric auctions with and without a quota, we develop a new method that is similar but distinctly di erent 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.

Keywords: asymmetric auction; optimal auction; experimental auction; multi-unit auction (search for similar items in EconPapers)
JEL-codes: C63 C91 D44 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2014-03
New Economics Papers: this item is included in nep-com and nep-exp
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Citations: View citations in EconPapers (1)

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