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Review of Financial Studies
Year: 2009  |  Volume: 22  |  Issue: 11  |  Page No.: 4531 - 4552

Open-Loop Equilibria and Perfect Competition in Option Exercise Games

K Back and D. 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.

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