In this paper, we propose a market model where microgrids sell their surplus power to a utility via aggregators. This is a scalable model where a utility does not directly interact with a large number of microgrids. Thus, aggregators collect power from microgrids and resell it to the utility. From the microgrids' perspective, aggregators are buyers. From the utility's perspective, aggregators are sellers. In this context, based on the two-stage Stackelberg game, we show how to achieve efficient market equilibrium using the tatonnement process and supply function bidding. We also show that the participation of aggregators may significantly affect the market depending on the supply elasticity of microgrids, which in turn depends on the cost structure of microgrids. For example, when the cost function of microgrids is roughly linear, the aggregators may not make a profit. However, if the cost function of microgrids has a higher order term, aggregators may accumulate a large profit, which potentially raises the issue of the regulator's role in the market. © 2011 Alcatel-Lucent.islanding operation upon a power disturbance in the electrical distribution system; however, in a normal mode of operation, microgrids are connected to the grid and can import/export power from/to the power grid [2]. In this paper we consider a market model where microgrids have surplus power and thus incentive to participate in the power market. Our goal is to capture the market behavior when there are a large number of microgrids, each with small generation capacity. Specifically, the direct participation of individual microgrids in the retail market may not be scalable since a utility faces the problem of dealing with a large number of small power sources [2]. To address this scalability problem, we introduce the concept of Korea Telecom Network Laboratory for five years prior to his tenure at Alcatel-Lucent, where he participated in Full Service Access Network (FSAN) and ITU-T SG16 FS-VDSL standardization efforts. His research interests include smart grid, demand response, information middleware, network resource allocation, optimization, network economics, and cross layer design of wireless communication systems. Dr. Kim has authored more than 30 papers in IEEE and ACM journals. MARINA THOTTAN is director of the Mission-Critical Communications and Networking Group at Alcatel-Lucent Bell Labs in Murray Hill, New Jersey, USA. She has contributed to a wide variety of projects in diverse subject areas including online gaming, content distribution, Voice over IP (VoIP), routing protocols, data over optical networks, high speed router design, network management and anomaly detection. Most recently she has been leading work on smart grid communication networks. She holds a Ph.D. degree in electrical and computer engineering from Rensselaer Polytechnic Institute, Troy, New York. Dr. Thottan has published over 40 papers in scientific journals, book chapters, and refereed conferences. She is a member of both the IEEE and ACM. ◆