Mechanism design and allocation algorithms for network markets with piece-wise linear costs and externalities

Benjamin Heymann (1) , Alejandro Jofré (2)

1 Commands - Control, Optimization, Models, Methods and Applications for Nonlinear Dynamical Systems
2 CMM - Center for Mathematical Modeling

Motivated by market power in electricity market we introduce a mechanism design in [1] for simplified markets of two agents with linear production cost functions. In standard procurement auctions, the market power resulting from the quadratic transmission losses allow the producers to bid above their true value (i.e. production cost). The mechanism proposed in the previous paper reduces the producers margin to the society benefit. We extend those results to a more general market made of a finite number of agents with piecewise linear cost functions, which make the problem more difficult, but at the same time more realistic. We show that the methodology works for a large class of externalities. We also provide two algorithms to solve the principal allocation problem.

Mots clés: Electricity markets; Allocation algorithm; Mechanism design; Auctions; Fixed point

Domaines: Mathématiques [math]; Économie et finance quantitative [q-fin]

Benjamin Heymann, Alejandro Jofré. Mechanism design and allocation algorithms for network markets with piece-wise linear costs and externalities. 2016. ⟨hal-01416411⟩