Price-taker bidding strategy based on Mental Accounting

Using the concept of ldquomental accounting, MArdquo of behavioral economics, the paper analyses the psychology of GenCos when making a risk bidding decision. Based on the result of analysis, a novel risk decision-making framework is developed to help the price-taker GenCos obtain their satisfied step-wise bidding curves in a pay-as-bid auction. In this framework, the total generation of a GenCo is divided into three separate mental accounts and each has its own independent intent: the first is used to avoid the shut-down loss, the second is used to gain the normal profits, and the last is used to gain the excess profits. In each mental account, basic risk preference, the influence of expected profit goal, and the potential loss from the failure of bids are taken into consideration simultaneously. At last, illustrative example shows the results this framework yields are consistent with the real bidding behaviors of GenCos.