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.
Construct a game in strategic form to analyze the
choices of Ivy and State, and identify the equilibrium/equilibria.
government backing, the NCAA can punish colleges that pay more than the NCAA
permitted salaries. How would this affect the equilibrium/equilibria?
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