Comparative Analysis of Game Theory Application
to Various Types of Auctions in Electric Markets
Nilson Sá Costa Filho, Felipe O. S. Saraiva, and V. Leonardo Paucar, Senior Member, IEEE
Abstract— The various changes that have occurred in the
electricity markets around the world have introduced
competition among the participants in this sector. Thus, the
generation agents that participate on electrical energy auctions
may prefer to build optimal strategies to maximize their profits.
Mathematical models based on game theory have been used in
the analysis of electric energy markets and especially in
electricity auctions. In this sense, this theory optimizes the
decision-making process for setting prices offered by the
generators to the system operator in a power auction. This paper
deals with a comparative analysis of individual strategies of
generating units, using a non-cooperative game theory approach
and incomplete information on various types of auctions. A
modified version of IEEE 57-bus test system is used to illustrate
the main features of the auction models used.
Index Terms—— Artificial intelligence, game theory, auctions
in electric markets, electric power systems.
I. INTRODUCTION
T HE electricity markets have experienced over the years,
many changes have occurred until the current time with
distinct characteristics between these markets. The
international reforms were mainly directed to the transition
from regulated monopolies to liberalized markets, and at
present the competition among electric energy agents and
more investments in the electricity sector are encouraged [1].
In the current commercialization mechanisms of electricity
markets, it is usual the practice of auctions because it is a form
for preventing, at least in part, the collusion and mitigation of
risk involved in power generation from the perspective of the
generator [2, 3]. The bidding problem is composed of known
parameters by the generating units, i.e. their production costs,
and unknown parameters which are, for example, the
production cost curves and the potential bids of their
opponents. Thus, if a generating unit seeks to obtain the
optimal bidding to maximize its individual profit, it will have
to face a strategic problem in electric energy auctions [3].
The interaction between participants in electric energy
auctions may be simulated by computer models which can
Manuscript submitted on October 17, 2016. This work was supported in
part by Brazilian Foundations CAPES and FAPEMA.
The authors are with the Electrical Engineering Department, Federal
University of Maranhão (UFMA), São Luis-MA, 65080-805, Brazil (e-mails:
nilson.mtm@hotmail.com, felipe.oss98@gmail.com, Lpaucar@ieee.org).
978-1-5090-2938-9/16/$31.00 ©2016 IEEE
Authorized licensed use limited to: UNIVERSIDADE FEDERAL DE SANTA CATARINA. Downloaded on May 17,2022 at 00:29:48 UTC from IEEE Xplore. Restrictions apply.
approximately forecast the behavior of participants in the
auctions. The game theory, an area of artificial intelligence
(AI), may support the modeling and analysis of phenomena
that occur when two or more players of decision interact with
each other [4].
This work is divided as follows: The games theory and
electric energy auctions is presented in section 2. In section 3
is presented the methodology used for the comparison of
various types of auctions. Then in section 4 the application of
the methodology and the analysis of results are presented.
Section 5 corresponds to the conclusion of this research.
II. GAME THEORY AND ELECTRIC ENERGY AUCTIONS
Auctions of electric energy can be modeled by game theory.
In this section concepts of game theory and aspects of
biddings in electricity auctions are described.
A. Game Theory
The main models used in game theory are: strategic form,
extensive form and coalition form. Studies on the electricity
markets show that their behavior is close to strategic form [4].
In this section the basic elements of a game in the strategic
format are briefly described.
From the perspective of game theory a game has the
following elements [5-8]: a finite set of players
,, wherein each player has a finite
set of pure strategies . The choice of a
strategy by the player is called pure strategy profile and it is
defined by vector . The set of all
strategy profiles form the pure strategy space of game, i.e. the
Cartesian product .
Each player has a utility function that associates a
real number (the gain or payoff) of the player to
every strategy profile of game .
There are available several types of games depending on the
criteria adopted. Depending on the interaction between
players, a game can be classified as cooperative when
individuals act in combination and the decision of each one
depends on the group's strategy. Otherwise, it is called a non-
cooperative game, when individuals work with their strategies
alone in order to determine a winner [7, 8]. A game is of
perfect information when everyone knows previously the
whole history of game. The game will be said of imperfect
information, if any player at some point of the game, it has to
make its move without knowing the history of the game to
date. In relation to the asymmetry of information, a game is
 said of complete information when its earnings are of common
knowledge, otherwise it is called of incomplete information. A
game according to its stages can be simultaneous, when it is
developed only in one step, or sequential, in which it has a
profile strategies for each stage of the game [7, 8].
The solution of a game considers a prediction of the result.
There are several concepts of solution; the most common are
the dominance and the Nash equilibrium. The Nash
equilibrium, which is the type of solution used in this study is
defined as the set of offers from all the generating units (GUs)
such that no GU can increase its profit unilaterally changing
the offer chosen [6]. Making use of this solution is possible to
predict what will happen when several GUs are making
decisions at the same time, and analyze the interdependence of
these decisions.
The economist William Vickrey, winner of the Nobel Prize
in Economics, was one of the precursors of the study on the
theory of auctions, which is an application area of game theory
[9]. An electricity auction to be well effected, should have
well-formulated institutional rules, as they directly influence
the strategies of the bidders and should thus stimulate the
interest of all potential offerors, avoiding the practice of
collusion and selecting those with the best bids, considering
the economic, environmental, technical and social aspects
where the energy system will be implemented [10].
There are several types of auctions; the four formats listed
below are considered classics [10, 11]:
a) Open descending auction or Dutch auction
The bidders of this auction submit progressive open bids
with new bids lower than the last received bid. The auction
ends when a bid is not outbid by another bid.
b) Open ascending auction or English auction
The dynamics of this auction consists of open, progressive
and ascending bids made until only one bidder remains.
c) First-price sealed-bid auction
This auction has its procedure based on only a sealed bid
submitted by the bidder.
d) Second-price sealed-bid auction or Vickrey auction
This auction has its methodology similar to the first-price
sealed-bid auction, however the winning bid will be the second
best bid.
Thus, according to [12] the electricity auctions can be
modeled as a strategic game with the following features:
• At least two players, i.e. each GU is a player: each GU
has at least one strategy (biddings);
• Incomplete information: since the cost and evaluation
functions of each player is confidential information;
• Non cooperative: considering that there is competition
between the players, there is no cooperation (cartels
and collusions are neglected in this work);
• It can be simultaneous, when there is only one bid as
well as sequential when there are successive bids. To
fulfill the purposes of this work will be assessed a
few cases.
Authorized licensed use limited to: UNIVERSIDADE FEDERAL DE SANTA CATARINA. Downloaded on May 17,2022 at 00:29:48 UTC from IEEE Xplore. Restrictions apply.
To fulfill the purposes of this work will be assessed some
cases of biddings.
A. Bidding in Auctions of Electricity Markets
After the deregulation of the market previously mentioned,
the generating units now have greater risks than before
because of price volatility in the short-term energy market.
Thus, each generating unit knowing its own costs, the
technical constraints of the system simulate the approximate
behavior of its competitors and the market, facing the problem
of building the optimal bid to be delivered to the system
operator [13]. This problem known as a strategic bidding
problem has been solved through the application of game
theory and other approaches that seek strategies’ optimization
at auctions in the competitive electricity market. Reference
[14] developed the balance based on Nash bidding strategy in
a competitive electricity market. Algorithms based on multi-
agent systems have been applied to find the balance of a game
based on double auction in electricity market [15]. In [16] an
evolutionary game approach to analyze bidding strategies
considering the elastic demand is proposed. The optimal
bidding strategies for generating units in a competitive market
were studied in [17] using game theory to estimate the rival
behavior and discourage coalitions. The comprehensive
comparative analysis of several theoretical models games
electricity markets was presented in [3]. New methods focused
on optimizing the selling price of the generating units continue
to be studied.
III. METHODOLOGY OF ELECTRICITY AUCTIONS IN THE FORM
OF A GAME
After the bibliographical survey on the methods of game
theory in power auctions, various methodologies from the
perspective of electricity generating units were identified,
where one of them drew attention by the number of bids
analyzed simultaneously and presented in [15], as well as most
other practices exposed in [17].
The methodology simulates the electricity auctions in the
form of a game where: the total demand D is known by GU's,
however we will simulate it in another way, taking into
account the various types of auctions. The bids submitted by
GUs to the System Operator are:
Bid 1 represented by the ordered pair , bid 2 by
bid 3 and so on depending on the number of
required bids.
Where:
• , are the prices per unit generated with, <
• is the power supplied with,
, being the maximum
generation capacity.
Each GU tries to represent the strategic behavior of its
competitors to maximize their profit based on a sequence of
detailed actions on the following subsections.
 A. Obtaining the set of strategies
(9
The set of strategies or possible bids of a GU equipped )
with its standard cost curve , come from
the Cartesian product of the triple ,
. (10
)
Where the marginal cost in parts “low” and “high” of
the agents . For this work we simulate a maximum of In (3), denotes the total cost of active power output
three bids with represented as follows: of the generator i within one-hour interval. Equalities exposed
in (4) e (5) indicate the power balance constraints of the
; optimal power flow (OPF) in question. In the equation shown
; (1) in (4), designates the vector of
angles and voltage magnitudes, represents the entire
active power flow leaving the bar k, is the active output
The values are defined as 10% above and below the power of generator i, indicates the active power demand in
average values, as described in (2). the k bar. In the expression shown in (5), designates the
; total reactive power flow leaving the k bar, indicates the
(2)
reactive power output of the generator i, and is the
B. Modeling strategies of competitors reactive power demand on k bar. The previously described
To maximize its strategy in an environment with players, and flows are calculated respectively by the expressions
each GU simulates the behavior of their competitors by (9) and (10) [18].
creating a set of n Virtual Generating Units (VU), filling the (11)
gaps of incomplete information game. Therefore, it is imposed
on each VU a cost curve, which shows the fidelity with which
(12)
this curve represents its competitor. In addition, each GU may
have a number k of games which is related to the profit level
of satisfaction obtained by this. Where, each set having The illustrated inequality in (6) consists of a generic
possibilities, where n is the number of GUs. representation of network constraints which characterize the
current OPF. Such inequality incorporates the restriction of
The set of possibilities for the k-th game can be represented inequalities exposed (11) and (12). Furthermore, the
by a payoff matrix where GU bids possibilities are exposed in inequalities given in (7) and (8) represent the output of the
lines and joint opportunities for VU's in columns. generator limits, in which and denote, respectively,
C. Determining the best strategy the minimum active and reactive power output allowed for the
Based on the bids of each GU is made a dispatch of generating unit i [18].
minimum cost in each cell of the payoff matrix that is Then profit li obtained by GUi is assigned to the value of the
described for the above equation (3) to (12) according to [18]. cell. This profit is calculated by:

(3) li (gi) = gi . λi - CCi(gi) (13)

where:
s.t.
gi : is the total energy dispatched by GUi
(4) λi : corresponds to the value of the spot price obtained in the
solution of the dispatch problem.
The game result is achieved using one of the Game Theory
tools, maximin criterion, and represents the expected profit for
(5) GUi . The process consists of:
• Examine the minimum value of each
row i and obtain the vector , called vector of
(6)
minimum expected profits in the k-th game.

(7) • Then select the maximum value of the minimum

k
indicated by vi .
(8)

Authorized licensed use limited to: UNIVERSIDADE FEDERAL DE SANTA CATARINA. Downloaded on May 17,2022 at 00:29:48 UTC from IEEE Xplore. Restrictions apply.
 • In the vector it is determined if the same values to Applying the methodology to the second-price sealed-bid
k
v exist, indicated by n v . k auction, the following bids are obtained:
i i
• So is assigned to each element of the vector a TABLE III. SET OF STRATEGIES SA
probability whose value is zero for all elements Bid 1 Bid 2
GU
smaller than and for elements equals to .
Obtaining another vector named probability SA,1 (20.0500; 325.4) (24.1501; 325.4)
distribution vector of the k-th game . SA,2 (20.0500; 325.4) (26.8334; 325.4)
• Finally, after all the games have been simulated and (20.0500; 325.4) (29.5167; 325.4)
SA,3
their payoff matrices calculated, you can find the
overall result by analyzing the probability distribution SA,4 (22.2778; 325.4) (24.1501; 325.4)
vector of all possible strategies for the GUi SA,5 (22.2778; 325.4) (26.8334; 325.4)

SA,6 (22.2778; 325.4) (29.5167; 325.4)

D. Application of the best strategy
Bidding found after analysis of the vectors are forwarded SA,7 (24.5056; 325.4) (24.1501; 325.4)
to the System Operator (SO) which then will hold the dispatch SA,9 (24.5056; 325.4) (26.8334; 325.4)
of minimum cost taking into consideration the demand and (24.5056; 325.4) (29.5167; 325.4)
SA,8
bids submitted by all environment’s GUs.
E. Analysis of results
After completion of the dispatch, the SO presents to the Finding:
GUs the value obtained by each of them. So if the profit of the • vector l = (2.8960; 2.9408; 2.9199; 2.9276; 2.9354;
GU is below its expectation, GU will have to seek a better 2.9166; 2.9033; 2.8547; 2.9325);
approximation of the virtual units cost curves, and then repeat
• Maxmin v = 2.9408;
the methodology.
• probability distribution vector ω = (0, 100, 0, 0, 0, 0,
IV. APPLICATION OF THE METHODOLOGY 0, 0, 0);
Aiming to compare some types of auctions making use of Thus, among the pairs of strategies SA represented in Table
the methodology previously proposed, it is considered, in this IV, the strategy in which GUA get higher profits and greater
example, the IEEE 57-bus test system for validation. The probability of acceptance based on bids found by VUs is the
parameter values of such a system were acquired in [19]. For pair of bids of strategy SA,2, with:
the implementation of this strategy of offerings optimization,
Bid 1: (20.0500; 100)
it is assumed that such a test system is constituted only by the
generating units connected to the bars 1 and 5. The operational Bid 2: (26.8334; 100)
limits and the coefficients of electricity production cost
with both bids, the GUA will get a profit of 3.0837 x 103 $/h.
functions of such generating units are adequately specified in
Table I. The bids that found the perspective of a first-price auction
were:
TABLE I. PARAMETER VALUES OF IEEE 57-BUS TEST SYSTEM
TABLE IV. SET OF STRATEGIES SA
Minimum Maximum
Bus of
output output GU Bid 1
generating
power power
unit A SA,1 (24.1501; 650.8)
(MW) (MW)
1 0 650.8 0.007 20 0 SA,2 (26.8334; 650.8)
SA,3 (29.5167; 650.8)
Under the perspective of a given GU, the behavior of the
virtual units (VUs) electricity production costs are estimated
Getting a higher income of 5.5841x103 $/h with the bid AS,3.
and exposed in the Table II.

TABLE II. COST FUNCTIONS OF VIRTUAL UNITS From the perspective of the English auction, taking into
account only three bids in ascending order in a closed shed the
Cost function for the production of amount of bidding options that can be offered to the system
VUs electricity of the VUs operator increases. Therefore, the bids were found among the
($/h)
27 bids were those ones with probability of 11.12%; they are
Virtual Unit 1 shown in Table V.
Virtual Unit 2

Authorized licensed use limited to: UNIVERSIDADE FEDERAL DE SANTA CATARINA. Downloaded on May 17,2022 at 00:29:48 UTC from IEEE Xplore. Restrictions apply.
 TABLE V. SET OF STRATEGIES SA performances of network constrained electricity markets,” IET
GU Bid 1 Bid 2 Bid 3 generation, transmission & distribution, vol. 4, p. 386, 2010.
[4] R. K. Mallick, R. Agrawal, and P. K. Hota, “Bidding strategy of
ipp in competitive electricity market using faclpso,” in Proc. of
SA,3 (18.8200; 216.94) (20.0500; 216.94) (29.5167; 216.94) International Conference on Electrical, Electronics, and
Optimization Techniques (ICEEOT). ICEEOT, 2016, pp. 1–6.
SA,6 (18.8200; 216.94) (22.2778; 216.94) (29.5167; 216.94) [5] B. A. Sartini, G. Garbugio, H. J. Bortolossi, P. A. Santos, and L.
SA,9 (18.8200; 216.94) (24.5056; 216.94) (29.5167; 216.94)
S. Barreto, “Uma introdução à teoria dos jogos,” II Bienal da
SBM–Universidade Federal da Bahia, pp. 1–61, 2004.
SA,15 (20.9111; 216.94) (22.2778; 216.94) (29.5167; 216.94) [6] [5] M. J. Osborne, An Introduction to Game Theory. Hardcover,
(20.9111; 216.94) (24.5056; 216.94) (29.5167; 216.94)
2003.
SA,18
[7] J. Watson, Strategy: An Introduction to Game Theory.
SA,27 (23.0022; 216.94) (24.5056; 216.94) (29.5167; 216.94) Hardcover, 2013.
[8] S. Tadelis, Game theory: an introduction. Princeton University
Press, 2013.
Thus, to improve the expectation of GU in relation to its [9] R. Gibbons, Game theory for applied economists. Princeton
earnings, it must choose the bids contained in the strategies University Press, 1992.
SA,9, SA,18 e SA,27. However, if the GU is a unit that bet on a [10] V. Krishna, Auction theory. Academic press, 2010.
smaller profit of 2.4799 x 103 $/h with a safe margin of [11] S. Chen, X. Liu, and S. Chen, “A comparative analysis of
several auction types with shill bidding,” in Proc. of
acceptance of its bids by the SO the chosen bid should be that
International Conference on Business Management and
of the strategy SA,3. Similarly, only the descendants of bids Electronic Information (BMEI). IEEE, 2011, pp. 736–739.
format, Dutch auction would take advantage of the same table [12] Z. Yang and G. Tang, “Application of genetic on analysis of
selecting the values in the opposite direction, taking into market equilibrium strategy with game theory,” in Proc. of the
account an auction of only three rounds. Third International Conference on Electric Utility Deregulation
and Restructuring and Power Technologies (DRPT). IEEE,
2008, pp. 238–241.
V. CONCLUSION
[13] J. V. Kumar and D. V. Kumar, “Particle swarm optimization
In this paper, an approach is used to find the best strategies based optimal bidding strategy in an open electricity market,”
of the GUs in some types of auctions. The method simulates International Journal of Engineering, Science and Technology,
the behavior of participants in an electricity auction, vol. 3, pp. 283–294, 2011.
[14] E. Hasan and F. D. Galiana, “Fast computation of pure strategy
considering the ISO’s objective function. The method is a
Nash equilibria in electricity markets cleared by merit order,”
combination of a game theory tool, maxmin, and probability IEEE Transactions on Power Systems, vol. 25, pp. 722–728,
distribution with approach of a non-cooperative game. This 2010.
method is best suited for second-price auctions and can be [15] P. Silva and L. Nepomuceno, “Simulação de mercados de
extended to more complicated networks with high precision in energia utilizando teoria de jogos e agentes inteligentes–
the results. However, the simulation shows that these more descrição do modelo,” SBAI Simpósio Brasileiro de Automação
Inteligente. Brasília, Brasil: SBAI, pp. 1–6, 2007.
complex environments and sequential auctions the
[16] J. Wang, Z. Zhou, and A. Botterud, “An evolutionary game
computational effort increases exponentially which makes it approach to analyzing bidding strategies in electricity markets
impossible to use this methodology in some systems. with elastic demand,” Energy, vol. 36, pp. 3459–3467, 2011.
[17] J. V. Kumar and D. V. Kumar, “Generation bidding strategy
REFERENCES based on game theory,” in Proc. of the International Symposium
Modern Electric Power Systems (MEPS). IEEE, 2010, pp. 1–5.
[1] D. Srinivasan, L. T. Trung, and C. Singh, “Bidding and
[18] H.Liu, L. Tesfatsion, and A. A. Chowdhury, “Locational
Cooperation Strategies for Electricity Buyers in Power
Marginal Pricing Basics for Restructured Wholesale Power
Markets,” IEEE Systems Journal, vol. 10, pp. 422–433, 2016.
Market,” in Proc. of the Power & Energy Society General
[2] S. Schone, Auctions in the electricity market: bidding when
Meeting. IEEE, 2009, pp. 1-8.
production capacity is constrained. Springer Science &
[19] University of Washington Electrical Engineering, “Power
Business Media, 2009.
systems test case archive,” 2016, URL:
[3] E. Bompard, Y. Ma, R. Napoli, G. Gross, and T. Guler,
https://www2.ee.washington.edu/research/pstca/ [accessed:
“Comparative analysis of game theory models for assessing the
2016- 09-02].

Authorized licensed use limited to: UNIVERSIDADE FEDERAL DE SANTA CATARINA. Downloaded on May 17,2022 at 00:29:48 UTC from IEEE Xplore. Restrictions apply.