Pricing for Information Revelation in Demand Response: A Strategic Communication Approach

TL;DR

This paper models strategic communication in demand response programs using game theory, showing how pricing can incentivize truthful information sharing and significantly improve system efficiency.

Contribution

It introduces a tractable analysis of multiple strategic consumers and derives optimal pricing strategies to maximize information revelation and system utility.

Findings

Proper pricing can recover up to 95% of ideal system utility.

Decoupling of multi-player interactions simplifies analysis.

Optimal uniform pricing controls information disclosure effectively.

Abstract

Many smart grid frameworks, such as demand response programs, require accurate information about consumers' parameters (e.g., flexibility) at the aggregator side to optimize grid operations. Existing works typically rely on perfect information assumptions or complex incentive-compatible mechanisms; however, in voluntary settings, and in the presence of strategic consumers, possibly implemented by automated intelligent agents, private parameters may be misreported due to strategic incentives. We analyze this communication setting using cheap-talk game theory, delivering four key insights. First, the nontrivial scenario of multiple strategic transmitters (consumers) turns out to be tractable for the case study of interest: we prove that complex strategic interactions among multiple consumers decouple into independent subgames. Second, we demonstrate that a pre-announced retail price can be exploited as a design lever to control the information revealed by the consumers and therefore the overall system efficiency. Third, we derive a closed-form expression for the optimal uniform price that maximizes information revelation. Finally, we characterize the equilibrium structure to identify when communication is informative. Simulations show that a properly designed price for the communication scheme can recover up to 95% of the ideal system utility (i.e., under perfect information reporting), whereas a price-unaware choice leads to significant losses in social welfare.