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IAI Actuarial Core Principles · Business Economics · Impact of advertising on sales and demand

A firm's advertising is found to have a higher advertising elasticity in a new market than in a mature market. Which is the most plausible explanation?

Advertising elasticity is higher in the new market because awareness is low there, so advertising informs consumers and generates first purchases. In mature markets most buyers already know the product and are loyal, so extra advertising adds less to sales.

  1. AConsumers in the new market are already fully informed about the product
  2. BBrand loyalty is stronger in the new market
  3. CAdvertising in the new market informs consumers and builds awareness that is largely absent, so sales respond more stronglyCorrect
  4. DMature markets have more elastic supply
  5. Advertising has no effect in mature markets by definition

Explanation

In new markets awareness is low, so advertising provides information and generates trial, producing a large sales response. In mature markets awareness and loyalty are established, so extra advertising mainly competes for share and yields smaller gains. 'No effect by definition' is too extreme.

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