Question

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 and 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.

Address these areas in your discussion:

1. Construct a game in strategic form to analyze the choices of Ivy and State, and identify the equilibrium/equilibria.
2. With government backing, the NCAA can punish colleges that pay more than the NCAA permitted salaries. How would this affect the equilibrium/equilibria?
3. Which of the following concepts best describes the NCAA rules on player salaries: monopoly, monopsony, economies of scale, or economies of scope. Explain your answer.

Answer 1

Since this is a strategic game, each player is aware of the other one’s actions and corresponding pay offs. So if Ivy chooses NCAA salaries, he knows that if State pays higher his pay off will come much down to 1. Again same will happen the other way if State selects NCAA salaries. So neither would choose NCAA salaries and they both go for more than NCAA salaries. Thus Nash equilibrium is (2,2)

If government imposes penalty then both would know that their payoffs would fall much below 2 million if both end up choosing more than NCAA salaries. Hence they would stick to the rules and get a higher pay off (3,3). This is an example of economies of scale where larger state with more resources can opt for skilled player compared to smaller state with less resources. This could also lead to a monopoly of the bigger state. Hence the rules of NCAA will ensure such monopoly is not established and each state gets fair access to the players.