Robust strategic bidding in auction-based markets

In this paper, we propose an alternative methodology for devising revenue-maximizing strategic bids under uncertainty in the competitors' bidding strategy. We focus on markets endowed with a sealed-bid uniform-price auction with multiple divisible products. On recognizing that the bids of competitors may deviate from equilibrium and are of difficult statistical characterization, we proposed a two-stage robust optimization model with equilibrium constraints aiming to devise risk-averse strategic bids. The proposed model is a trilevel optimization problem that can be recast as a particular instance of a bilevel program with equilibrium constraints. Reformulation procedures are proposed to find a single-level equivalent formulation suitable for column-and-constraint generation (CCG) algorithm. Results show that even for the case in which an imprecision of 1% is observed on the rivals' bids in the equilibrium point, the robust solution provides a significant risk reduction (of 79.9%) in out-of-sample tests. They also indicate that the best strategy against high levels of uncertainty on competitors' bid approaches to a price-taker offer, i.e., bid maximum capacity at marginal cost. (C) 2018 Elsevier B.V. All rights reserved.