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Open-Loop Equilibria and Perfect Competition in Option Exercise Games

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  • Kerry Back
  • Dirk Paulsen
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    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.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 22 (2009)
    Issue (Month): 11 (November)
    Pages: 4531-4552

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    Handle: RePEc:oup:rfinst:v:22:y:2009:i:11:p:4531-4552

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    Cited by:
    1. Huisman, K.J.M. & Kort, P.M., 2013. "Strategic Capacity Investment Under uncertainty," Discussion Paper 2013-003, Tilburg University, Center for Economic Research.
    2. Jan-Henrik Steg, 2009. "Irreversible investment in oligopoly," Working Papers 415, Bielefeld University, Center for Mathematical Economics.
    3. Steg, Jan-Henrik, 2013. "Strategic Capital Accumulation with Singular Control," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79948, Verein für Socialpolitik / German Economic Association.
    4. Boyarchenko, Svetlana & Levendorskii, Sergei, 2010. "Optimal stopping in Levy models, for non-monotone discontinuous payoffs," MPRA Paper 27999, University Library of Munich, Germany.
    5. Huang, Hsing-Hua & Chuang, Wei-Liang, 2013. "Real options game over the business cycle," Economic Modelling, Elsevier, vol. 35(C), pages 715-721.
    6. Thijssen, Jacco J.J. & Huisman, Kuno J.M. & Kort, Peter M., 2012. "Symmetric equilibrium strategies in game theoretic real option models," Journal of Mathematical Economics, Elsevier, vol. 48(4), pages 219-225.
    7. Giorgio Ferrari & Frank Riedel & Jan-Henrik Steg, 2013. "Continuous-Time Public Good Contribution under Uncertainty," Papers 1307.2849, arXiv.org.
    8. Luca Di Corato & Michele Moretto & Sergio Vergalli, 2013. "Long-run Investment under Uncertain Demand," Working Papers 2013.65, Fondazione Eni Enrico Mattei.
    9. Maria Cecilia Bustamante, 2011. "Strategic investment, industry concentration and the cross section of returns," LSE Research Online Documents on Economics 37454, London School of Economics and Political Science, LSE Library.
    10. GAHUNGU, Joachim & SMEERS, Yves, 2011. "A real options model for electricity capacity expansion," CORE Discussion Papers 2011044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. Maria Cecillia Bustamante, 2011. "Strategic Investment, Industry Concentration and the Cross Section of Returns," FMG Discussion Papers dp681, Financial Markets Group.
    12. Thomas Fagart, 2014. "Markovian Equilibrium in a Model of Investment Under Imperfect Competition," Documents de travail du Centre d'Economie de la Sorbonne 14039, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    13. Thomas Fagart, 2014. "Markovian Equilibrium in a Model of Investment Under Imperfect Competition," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01020398, HAL.
    14. Ren\'e A\"id & Luciano Campi & Nicolas Langren\'e & Huy\^en Pham, 2012. "A probabilistic numerical method for optimal multiple switching problem and application to investments in electricity generation," Papers 1210.8175, arXiv.org.
    15. René Aïd & Luciano Campi & Nicolas Langrené & Huyên Pham, 2012. "A probabilistic numerical method for optimal multiple switching problem and application to investments in electricity generation," Working Papers hal-00747229, HAL.
    16. Joachim Gahungu and Yves Smeers, 2012. "A Real Options Model for Electricity Capacity Expansion," RSCAS Working Papers 2012/08, European University Institute.

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