I think I read a different interpretation of your original post than you suggested, but I think you have the wrong emphasis, to the point of distraction. You talked about the "'reputation' of a particular college or university" when you probably meant "'reputation' of a specific degree program for producing graduates with the training needed for a specialized field."
This is a much more constrained and much less actionable qualifier.
To express it in more words, I thought in your original statement you were saying something like "Harvard has a good overall reputation so a 3.25 from there is better than a 3.75 from a school with a (sufficiently) lower reputation, all else being equal."
Now you're saying something like "Missouri University of Science and Technology's EE program has a good reputation in vacuum power engineering, so someone with a 3.25 from that program is better than a 3.75 from the EE program at Harvard, all else being equal, if you need someone with vacuum power engineering skills."
I assumed you implied an "all else being equal", because it's meaningless to say that someone with a music degree from Stanford is a great hire when you're looking for someone to work with x-ray crystallography, just because Stanford has a great biophysics program with lots of world-famous x-ray crystallography work being done there.
No, I think you should be saying "if you have two candidates, both with EE degrees and similar coursework, then the reputation of their corresponding EE programs should also be factor, and not just GPA."
But your scenario just now has the student from XYZ (the better school) also taking more courses in the specific field of interest, while the person from ABC only took a single pro-forma course.
So I'll invert it. Let's say that student X from college ABC, which has a second quartile ranking as an EE program, graduates with triple major in EE (with a focus in analog chip design), physics, and English, with a 3.75 GPA.
While student A from college XYZ (which has the best analog chip design training reputation in the world), graduates with an English degree with a 3.25 GPA, and a EE minor, with a single analog circuits class. (Student A came in thinking to be a EE grad, then in sophomore year switched to English.)
Who would you rather hire - the student with a higher GPA and with more training and interest, but from a lesser reputation program, or the student with a lower GPA and not much interest or training, but from the school with the higher reputation program?
BTW, the hiring manager is not in a 'prisoner's dilemma situation'. That requires two people who can make a choice, where the payoff matrix depends on both choices, but there's only one here. The scenario you describe is much closer to the FUD of "nobody ever got fired for buying IBM equipment."