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Locational marginal pricing (LMP) is a widely employed method for pricingelectricity in the wholesale electricity market. Although it is well known thatthe LMP mechanism is vulnerable to market manipulation, there is littleliterature providing a systematic analysis of this phenomenon. In the firstpart of this paper, we investigate the economic dispatch outcomes of the LMPmechanism with strategic agents. We show via counterexamples, that contrary topopular belief, a Nash equilibrium may not exist. And when it exists, the priceof anarchy may be arbitrarily large. We then provide two sufficient conditionsunder either of which an efficient Nash equilibria exists. Last, we propose anew market mechanism for electricity markets, the Power Network Second Price(PNSP) mechanism that always induces an efficient Nash equilibrium. We brieflyaddress the extensions on the demand side.

A Nash Equilibrium Need Not Exist in the Locational Marginal Pricing Mechanism