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

A private bank that already leads its segment increases advertising spend mainly to stop customers switching after a rival launched an aggressive offer. Which primary objective does this reflect?

The objective is defending existing market share. The bank is already the leader and is advertising to keep customers from switching to a rival's offer, rather than to inform about a new product or enter a new market. Advertising typically adds cost, not reduces it.

  1. AEntering a new market
  2. BInforming customers of a new product
  3. CDefending existing market shareCorrect
  4. DRaising the price elasticity of demand
  5. Reducing the firm's fixed costs

Explanation

Spending to hold customers against a rival's offer is defensive: the aim is to protect current share. No new product or market is mentioned. Effective brand advertising usually aims to make demand less, not more, price elastic, so that option is wrong. Advertising adds to costs rather than cutting fixed costs.

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