A New Method for Equilibrium Selection in Financial Transmission Right’s Auctions
Published:
Problem setting: In financial point-to-point auctions, each player submits a bid for pair of nodes, amount of point-to-point tranmission rights that it seeks to acquire, and the price for this bid. This is an auction, and a standard tool to analyze it is to model the auction as a game and look for the Nash equilibrium of the model. This problem, due to its nature, can display multiple Nash equilibria, and in some cases, infinite number of Nash equilibria. For example, consider the following illustrative example and the area for the Nash equilibria. For this example we fixed the pair of nodes and the amount, and let the players compete on the prices only.
Method: We introduced the terms value of a strategy and chance of an NE to derive criteria for equilibrium selection. From the final set of NEs, the one with the highest chance will be chosen.
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