IAI Actuarial Core Principles · Business Economics · Impact of advertising on sales and demand
In a market where a few large insurers compete mainly on brand image rather than on price, which feature of oligopoly best explains why heavy advertising is common?
Oligopolists are interdependent and fear price wars because rivals can match price cuts. They therefore prefer non-price competition such as advertising and branding to win customers, which explains why advertising is heavy in oligopolistic markets such as insurance.
- AFirms are price takers and must advertise to be noticed
- BPrice competition is risky because rivals may match cuts, so firms use non-price competition such as advertisingCorrect
- CEntry is free, so advertising is needed to remove supernormal profit
- DProducts are perfectly homogeneous, so advertising informs buyers of quality differences
- Demand is perfectly elastic, so advertising raises price without losing sales
Explanation
In oligopoly firms are interdependent. A price cut may be matched by rivals, leaving everyone worse off, so firms prefer non-price competition including advertising and branding. The other options describe perfect competition or features that do not hold in oligopoly.
Did you get it right without looking?
One question tells you little. A timed set on Impact of advertising on sales and demand shows your real accuracy, how long you take and where you lose marks.
More Impact of advertising on sales and demand questions
- A life insurer's marketing team finds that each additional rupee of advertising yields progressively smaller increases in policy sales, and …
- A Bengaluru bank's credit card division has price elasticity of demand of -2 and advertising elasticity of demand of 0.5. Using the Dorfman-…
- All major Indian dairy cooperatives jointly fund a campaign urging consumers to drink more milk, without promoting any single brand. Which t…
- A mutual fund house finds that its advertising makes investors less sensitive to fee differences between its schemes and those of rivals, be…
- Which of the following is the most likely reason that informative advertising by a new digital insurance platform shifts its demand curve to…
- A private health insurer in Pune raises its monthly advertising spend by 10% and observes that policy sales rise by 4%, with all other facto…