Iivo Vehviläinen

Abstract

When demand aggregates both price-sensitive and price-insensitive behaviors, uniform pricing becomes a deficient market design that generates negative surplus during extreme-price events. We develop a price-control mechanism that efficiently resolves the tradeoff between protecting consumers and limiting rents. The mechanism implements a dynamic price cap that responds to demand adjustments and induces truthful supply through incentive payments. In a quantitative application to the French wholesale electricity market during the 2022–2023 energy crisis, the mechanism would have lowered expected procurement costs by roughly €200 billion, about two-thirds of total projected costs in this central scenario.