Pay-as-bid versus marginal pricing: The role of suppliers strategic behavior

This paper illustrates how a generator profit may be affected by the pricing method of an oligopoly market model. Through utilizing a bilevel optimization technique and game theory concepts, Supply Function Equilibria (SFE) of pay-as-bid pricing (PABP) and marginal pricing (MP) mechanisms are derived. Theoretically, it is demonstrated that in the presence of strategic interaction, the generator optimal bidding strategy and the market clearing price are higher under PABP as compared with MP. In addition, the probability distribution patterns of expected loss and profit of each generator are constructed by simulating a multiperiod market under PABP and MP rules. It is shown that a generator has a higher expected loss or profit under PABP in unconstrained networks. However, the generator may gain less expected loss or profit if its physical location or transmission limitations are considered.

► Supply Function Equilibria of pay-as-bid and marginal pricing mechanisms are derived.
► We show that generators optimal bid and market clearing price are higher under PABP.
► We found generators have higher expected loss/profit in PABP in unrestrained network.