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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?
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