Kerry Back
Open Loop Equilibria and Perfect Competition in Option Exercise
Games.
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.