Smart Grid is a system that accommodates different energy sources, including solar, wind, tidal, electric vehicles, and also facilitates communication between users and suppliers. This study tries to picture the interaction among all new sources of energy and market, besides managing supplies and demands in the system while meeting network's limitations. First, an appropriate energy system mechanism is proposed to motivate use of green and renewable energies while addressing current system's deficiencies. Then concepts and techniques from game theory, network optimization, and market design are borrowed to model the system as a Stackelberg game. Existence of an equilibrium solution to the problem is proved mathematically, and an algorithm is developed to solve the proposed nonlinear bi-level optimization model in real time. Then the model is converted to a mathematical program with equilibrium constraints using lower level's optimality conditions. Results from different solution techniques including MIP, SOS, and nonlinear MPEC solvers are compared with the proposed algorithm. Examples illustrate the appropriateness and usefulness of the both proposed system mechanism and heuristic algorithm in modeling the market and solving the corresponding large scale bi-level model. To the best knowledge of the writer there is no efficient algorithm in solving large scale bi-level models and any solution approach in the literature is problem specific. This research could be implemented in the future Smart Grid meters to help users communicate with the system and enables the system to accommodate different sources of energy. It prevents waste of energy by optimizing users' schedule of trades in the grid. Also recommendations to energy policy makers are made based on results in this research. This research contributes to science by combining knowledge of market structure and demand management to design an optimal trade schedule for all agents in the energy network including users and suppliers. Current studies in this area mostly focus either in market design or in demand management side. However, by combining these two areas of knowledge in this study, not only will the whole system be more efficient, but it also will be more likely to make the system operational in real world.