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

Economists who defend advertising in concentrated financial services markets are most likely to argue which of the following?

Defenders argue that advertising lets new entrants announce themselves and win customers from incumbents, making markets more contestable. It can also expand sales and support economies of scale, lowering average costs, so it is not purely a barrier to entry.

  1. AAdvertising always makes demand perfectly inelastic, so firms invest more in product quality
  2. BAdvertising can support economies of scale and help new entrants challenge incumbents, increasing contestabilityCorrect
  3. CAdvertising eliminates the need for regulation of mis-selling
  4. DAdvertising lowers total industry demand, reducing externalities
  5. Advertising raises marginal cost to the efficient level

Explanation

Defenders note that advertising can inform customers and let a new entrant win share quickly, making markets more contestable. It can also spread demand across more output, supporting scale economies and lower average costs. The other options are incorrect claims.

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