Open Loop Equilibria and Perfect Competition in Option Exercise Games

34 Pages Posted: 31 May 2008 Last revised: 13 Jan 2009

See all articles by Kerry Back

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business

Dirk Paulsen

John Street Capital

Multiple version iconThere are 2 versions of this paper

Date Written: January 12, 2009

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.

Keywords: real options, option exercise games, dynamic oligopoly, NPV rule, open loop equilibria, closed loop equilibria, singular control

JEL Classification: C73, D43, G31

Suggested Citation

Back, Kerry and Paulsen, Dirk, Open Loop Equilibria and Perfect Competition in Option Exercise Games (January 12, 2009). Available at SSRN: https://ssrn.com/abstract=1139192 or http://dx.doi.org/10.2139/ssrn.1139192

Kerry Back (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Dirk Paulsen

John Street Capital ( email )

London
United Kingdom

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