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

Game constructed is a 2* 2 matrix as shown below. The final position that results from the game is called a Nash equilibrium.

Following payoff are possible: if both pay more then both will get less profit of $2 million. If One pays more and other pays less then paying more will get $5 million and other will get $ 1 million. If both remain at where they are both will get $3million.

In this case one firm will try to outsmart other by paying more but anticipating this move the rival also does the same thing as Nash equilibrium will be achieved when both firms will end up paying more and at less revenue.

If NCAA can punish colleges that pay more than the NCAA permitted salaries then firms will respond by making a cartel and maintain present position of paying less and get each $2 million. This will be Nash equilibrium in that case.

NCAA rules thus are leading to economies of scope in which NCAA will end up paying less and hence costs will be less for them.It is also due to the output of Ivy, therefore, reduces the price of paying in state.