National Collegiate Athletic Association

The National Collegiate Athletic Association (NCAA) restricts the amount that colleges and universities may pay their student athletes. Suppose that there are just two colleges in the NCAA: Ivy and State. Each must choose between paying athletes according to NCAA rules or paying more. If both Ivy and State follow the NCAA salaries, then each would earn $3 million. If one follows the NCAA salaries and the other pays more than NCAA salaries, then the college paying more can attract better players and would earn $5 million, while the college following NCAA would earn just $1 million. If both colleges pay more than NCAA salaries, they would increase their costs but not get better players, so both would earn $2 million.

(a) Construct a game in strategic form to analyze the choices of Ivy and State, and identify the equilibrium/equilibria.

(b)With government backing, the NCAA can punish colleges that pay more than the NCAA permitted salaries. How would this affect the equilibrium/equilibria?