Final answer:
When company B enters the market, company A should also enter, as suggested by prisoner's dilemma outcomes. Both firms are likely to expand output, leading to increased competition and equal sharing of the market, thereby earning modest profits.
Step-by-step explanation:
If company B decides to enter the new market, company A should use game theory principles to determine their best course of action. Based on the information provided that is similar to a prisoner's dilemma, the decision matrix suggests that company A should also enter the market regardless of company B's decision. This scenario often results in both companies expanding output, which distracts from the potentially higher combined profits that could be attained through cooperation and acting like a monopolist.
In real-world applications, this kind of situation where both firms decide to enter the market may lead to increased competition, potentially resulting in a state of equilibrium where both firms earn modest profits. Nevertheless, it's important to note that in practice, companies may use strategies such as differentiation through price, service, or product to achieve a competitive advantage and potentially alter the outcome suggested by the simplified decision matrix of a prisoner's dilemma.