Quadratic Regularization of Unit-Demand Envy-Free Pricing Problems and Application to Electricity Markets

Abstract

We consider a profit-maximizing model for pricing contracts as 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 classical 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 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 an efficient pivoting heuristic, which we compare with implicit or non-linear methods from bilevel programming. These results are illustrated by an application to the optimal pricing of electricity contracts on the French market.Comment: 37 pages, 9 figures; adding a section on the pricing of electricity contract