A smart market is a periodic auction which is cleared by the operations research technique of mathematical optimization, such as linear programming.
Finding a market-clearing allocation corresponds to solution of a simple knapsack problem, and does not require much computation.
During market design, constraints are selected to match the relevant physics and economics of the allocation problem.
Smart markets are achievable due to an enabling confluence of technologies: the internet to transmit users’ bids and the resulting prices and quantities, increased computation power to run the simulation and linear program, and real time monitoring.
[4] The modern electricity market is an important example of a two-sided smart market.,[5][6] Electricity markets clear every few minutes, and require coordination to ensure that power generation matches demand, and that power flows do not exceed network line capacities.
By clearing the market based on the dual prices, participants are charged on marginal values, rather than as bid.
Without the smart market, the line operator, all generators, and all distributors would have to be part of a monopoly in order to guarantee system coordination.
Only recently have researchers found robust means to obtain dual variables from integer programs.
The net pool market can be mathematically infeasible if participants are unwilling to trade sufficient quantities to allow feasibility.
The gross pool market will tend to be mathematically feasible, but could have an unacceptably high cost in the optimal objective value, should (buy) bids be too low compared to (sell) offers.