Quadratic regularization of bilevel pricing problems and application to electricity retail markets

Quentin Jacquet, Wim van Ackooij, Clémence Alasseur and Stéphane Gaubert

European Journal of Operational Research, 2024, vol. 313, issue 3, 841-857

Abstract: We consider the profit-maximization problem solved by an electricity retailer who aims at designing a menu of contracts. This is an extension of the unit-demand envy-free pricing problem: customers aim to choose a contract maximizing their utility based on a reservation bill and multiple price coefficients (attributes). A basic approach supposes that the customers have deterministic utilities; then, the response of each customer is highly sensitive to price since it concentrates on the best offer. A second classical approach is to consider logit model to add a probabilistic behavior in the customers’ choices. To circumvent the intrinsic instability of the former and the resolution difficulties of the latter, we introduce a quadratically regularized model of customer’s response, which leads to a quadratic program under complementarity constraints (QPCC). This allows to robustify the deterministic model, while keeping a strong geometrical structure. In particular, we show that the customer’s response is governed by a polyhedral complex, in which every polyhedral cell determines a set of contracts which is effectively chosen. Moreover, the deterministic model is recovered as a limit case of the regularized one. We exploit these geometrical properties to develop a pivoting heuristic, which we compare with implicit or non-linear methods from bilevel programming, showing the effectiveness of the approach. Throughout the paper, the electricity retailer problem is our guideline, and we present a numerical study on this application case.

Keywords: Pricing; Bilevel problem; Polyhedral complex; Logit; Electricity contracts (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221723003508
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:313:y:2024:i:3:p:841-857

DOI: 10.1016/j.ejor.2023.05.006

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().