Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/110323
Authors: 
Huppmann, Daniel
Siddiqui, Sauleh
Year of Publication: 
2015
Series/Report no.: 
DIW Discussion Papers 1475
Abstract: 
We propose a novel method to find Nash equilibria in games with binary decision variables by including compensation payments and incentive-compatibility constraints from non-cooperative game theory directly into an optimization framework in lieu of using first order conditions of a linearization, or relaxation of integrality conditions. The reformulation offers a new approach to obtain and interpret dual variables to binary constraints using the benefit or loss from deviation rather than marginal relaxations. The method endogenizes the trade-off between overall (societal) efficiency and compensation payments necessary to align incentives of individual players. We provide existence results and conditions under which this problem can be solved as a mixed-binary linear program. We apply the solution approach to a stylized nodal power-market equilibrium problem with binary on-off decisions. This illustrative example shows that our approach yields an exact solution to the binary Nash game with compensation. We compare different implementations of actual market rules within our model, in particular constraints ensuring non-negative profits (no-loss rule) and restrictions on the compensation payments to non-dispatched generators. We discuss the resulting equilibria in terms of overall welfare, efficiency, and allocational equity.
Subjects: 
binary Nash game
non-cooperative equilibrium
compensation
incentive compatibility
electricity market
power market
uplift payments
JEL: 
C72
C61
L13
L94
Document Type: 
Working Paper

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