An incentive-based demand response (DR) method and system are provided from the view of a grid operator (GO) to enable system-level dispatch of DR resources. The method spans three hierarchical levels of a GO, multiple service providers (SPs), and corresponding customers. The GO first posts an incentive to SPs, who will then invoke sub-programs with enrolled customers to negotiate quantities of demand reduction via providing SP incentives. In view of the 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 method is effective in helping compensate system resource deficiency at minimum cost.