Conjectural variation based bidding strategy in spot markets: Fundamentals and comparison with classical game theoretical bidding strategies

Abstract

In this paper, the concept of conjectural variation (CV) and its applications in electricity spot markets are introduced. The conjecture of a firm is defined as its belief or expectation of how its rivals will react to the change of its output. CV based bidding strategy (CVBS) method can help generation firms to improve their strategic bidding and maximize their profits in real electricity spot markets with imperfect information. In real applications, a firm using CVBS will integrate its rivals into one fictitious competitor and estimate its generation and reaction to the firm's change of output so that an optimal decision can be made accordingly. It is shown that classical game theoretic bidding strategies (GTBS) are special cases of CVBS families, and the system equilibrium reached via CVBS is a Nash equilibrium. Computer test results support the analytic conclusions very well. © 2003 Elsevier Science B.V. All rights reserved.