This paper proposes a novel incentive-based demand response model from the view of a grid operator to enable system-level dispatch of demand response resources. The model spans three hierarchical levels of a grid operator, multiple service providers, and corresponding customers. The grid operator first posts an incentive to service providers, who will then invoke sub-programs with enrolled customers to negotiate quantities of demand reduction via providing service provider incentives. In view of this hierarchical decision-making structure, a two-loop Stackelberg game is proposed to capture interactions between different actors. The existence of a unique Stackelberg equilibrium that provides optimal system solutions is demonstrated. Simulation results show that the proposed approach is effective in helping compensate system resource deficiency at minimum cost. (C) 2017 Elsevier Ltd. All rights reserved.