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Open-Loop Equilibria and Perfect Competition in Option Exercise Games

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  • Kerry Back
  • Dirk Paulsen

Abstract

The investment boundaries defined by Grenadier (2002) for an oligopoly investment game determine equilibria in open-loop strategies. As closed-loop strategies, they are not equilibria, because any firm by investing sooner can preempt the investments of other firms and expropriate the growth options. The perfectly competitive outcome is produced by closed-loop strategies that are mutually best responses. In this equilibrium, the option to delay investment has zero value, and the simple NPV rule is followed by all firms. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Kerry Back & Dirk Paulsen, 2009. "Open-Loop Equilibria and Perfect Competition in Option Exercise Games," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4531-4552, November.
    • Handle: RePEc:oup:rfinst:v:22:y:2009:i:11:p:4531-4552
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