A Dynamic Newsboy Model for Optimal Reserve Management in Electricity Markets
نویسندگان
چکیده
This paper examines a dynamic version of the newsboy problem in which a decision maker must maintain service capacity from several sources to attempt to meet uncertain demand for a perishable good, subject to the cost of providing sufficient capacity, and penalties for not meeting demand. A complete characterization of the optimal outcome is obtained when normalized demand is modeled as Brownian motion. The centralized optimal solution is a function of variability in demand, production variables, and the cost of insufficient capacity. The results presented in this paper form a foundation for research on decentralized markets. In a companion paper it is shown that market prices show extreme volatility in the efficient decentralized market outcome.
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