Open Loop Equilibria and Perfect Competition in Option Exercise Games
34 Pages Posted: 31 May 2008 Last revised: 13 Jan 2009
Date Written: January 12, 2009
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: Suggested Citation