You are, overall, wrong about this. While colleges will often try and get at least some students from regions from where there are generally few applicants, there is no limitation. The reason that 10%-15% are from the Midwest is because that’s proportionally how many applied.
As a rule, the majority of the domestic students who apply to any of the NESCACs or other colleges on the East Coast are from the East Coast. Kids from the Midwest who are looking for LACs are more likely to apply to Carleton, Macalester, Grinnell, St Olaf’s , DePauw, Kenyon, Denison, Oberlin, etc, than to LACs in the NE.
Some 10-30 kids from my daughter’s Chicago area high school applied to colleges like Carleton, Grinnell, etc, while no NESCAC and few other East Coast colleges received even 10 applications from the high school.
So the reason that a higher proportion of students at Kenyon are from the Midwest is because a higher proportion of students who apply to Kenyon are from the Midwest.
While there may be a benefit of being from the region in that a college is more likely to know the reputation of a high school which is well known, that will not cover the majority of high schools in a region.
However, even here there are exceptions. There are often connections between high schools and colleges in different regions - again, I’ll use my kid’s school as an example. Relatively large numbers of kids from the college would apply to Vassar, and their success rate tended to be good.