Linear Programming (LP)-based auction mechanisms are emerging as a transformative approach to market design, enabling the efficient allocation of resources in complex auction and trading environments. Unlike traditional mechanisms, which handle products in isolation, LP-based mechanisms employ mathematical optimization to consider all submitted bids and product interdependencies simultaneously. This enables the design and operation of markets in which buyers and sellers can bundle products, express complex preferences subject to some limitations, and be assured of fair, market-based clearing prices.
Over the past decade, LP-based auctions have been successfully designed and implemented across a variety of sectors. Noteworthy examples include gas pipeline capacity allocation, groundwater management rights trading, and Central Bank loan auctions. In each case, the LP framework has demonstrated reliability, scalability, and adaptability to specific market needs. NERA has advised on the design and implementation of a number of these processes.
In this white paper, Managing Director Hans-Martin Ihle and Consultant Yasmine Frizlen explore the circumstances under which LP mechanisms can solve hard allocation problems, in part drawing on our own experience. The authors also provide insight into the range of possible applications for LP-based auctions and trading mechanisms and the areas in which LP-based mechanisms will be used moving forward.
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