With restructuring of the power industry, competitive bidding for energy and ancillary services are increasingly recognized as an important part of electricity markets. It is desirable to optimize not only the generator's bid prices for energy and for providing minimized ancillary services but also the transmission congestion costs. In this paper, a hybrid approach of combining sequential dispatch with a direct search method is developed to deal with the multi-product and multi-area electricity market dispatch problem. The hybrid direct search method (HDSM) incorporates sequential dispatch into the direct search method to facilitate economic sharing of generation and reserve across areas and to minimize the total market cost in a multi-area competitive electricity market. The effects of tie line congestion and area spinning reserve requirement are also consistently reflected in the marginal price in each area. Numerical experiments are included to understand the various constraints in the market cost analysis and to provide valuable information for market participants in a pool oriented electricity market. (c) 2005 Elsevier Ltd. All rights reserved.