Ali Hortacsu

We propose an inverse optimization based methodology to determine market structure from the locational pricing of a commodity. The methodology requires that the market optically allocates goods and that locational prices correspond to shadow prices of this optimization problem. As a case-in-point, we study locational marginal price based electricity markets where prices are determined using the results of a centralized optimization for clearing the market. We apply the inverse optimization methodology to outcome data from the Midcontinent ISO electricity market and uncover transmission constraints explaining the price variation. We also discuss analytical applications such as identifying missing data and the residual demand derivative. To broaden the scope of applications, assumptions sufficient to justify the methodology for competitive markets are described.

Areas of Focus: Energy Markets
Definition
Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Electric Power
Definition
Electric Power
As the electric power system faces new pressures and opportunities, EPIC research is working to identify the mix of policies needed to accelerate the global transition to clean, reliable, affordable...