*5.3. Allocation and Payment*

The allocation rules decide to whom and how a market allocates resources. The paymen<sup>t</sup> rules, on the other hand, reward the accepted bids adequately, thereby setting the bidding incentives. Both rules affect market efficiency and prosumers' welfare. The design variables are: (1) the *objective*, the desired direction of resource allocation; (2) the *pricing mechanism* for the allocation; and (3) the *price cap* that limits a commodity's price.

*The objective*: The objective quantitatively describes the desired direction of resource allocation. The primary objective of a DCDS market is economic efficiency under reliability constraints. Other objectives such as integration of local renewables or community energy self-sufficiency may be considered as well.

*Pricing mechanism*: The pricing mechanism defines at which price a deal is closed [65]; it lays the basis of the incentive scheme. Payment is either universal (such as in uniform price auctions) or discriminatory (such as in pay-as-bid auctions) among market parties [53]. Universal pricing schemes are incentive-compatible and more predictable. However, marginal pricing may yield high prices; in such cases, we may consider discriminatory pricing, although it can be vulnerable to strategic bidding.

*Price cap*: A price cap (or floor) sets the maximum (or minimum) price of a commodity. In European wholesale markets, the energy price cap ranges from 150 to 3000 Euro/MWh [53]. Although it is meant to protect consumers against extreme prices, it limits prosumer's scarcity rents and affects incentive-compatibility. To avoid *missing money* problems [1], we sugges<sup>t</sup> avoiding price caps or keeping them sufficiently high [46], for instance to the value of the lost load.
