Can Liquidity be Predicted?


Assistant Professors Kang Wenjin and Yeo Wee Yong conducted a comprehensive analysis for the New York Stock Exchange (NYSE) limit order book. This was done at both the aggregate market-level and the individual stock-level, and based on a sample covering all the NYSE ordinary stocks. Through this study, the authors gained a better understanding of the liquidity in the market and, among other findings, are now able to predict market liquidity.

All over the world, market design has been moving towards that of a pure limit order book.

A limit order book is a record of the orders placed with a brokerage to buy or sell a set number of shares at a specified price or better.

Traditionally, market makers bear the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security.

They compete for customer order flow by showing buy and sell quotations for a guaranteed number of shares. Once an order is received, market makers immediately sell from their inventory or look for an offsetting order. This process happens within seconds.

In recent years, there has been a conversion of traditional dealer markets to hybrid or even pure limit order markets. New markets are being set up as pure limit order books, diminishing the roles of market makers.

For instance, Electronic Communication Networks (ECNs) eliminates the role of the third-party, making it one of the new alternative trading platforms which acts like limit order exchanges. Brokerages and individuals are now connected, trading directly between themselves.

Such a trend has drawn substantial amount of attention from academic scholars.


Limit order book and market design

Given the importance of liquidity in asset pricing and market efficiency, a better understanding of the limit order book and its liquidity provision can improve the design and regulation of financial exchanges and ultimately, the investor’s welfare.

In order to study the different dimensions of the limit order book and the liquidity it provides, Asst Profs Kang and Yeo looked at the New York Stock Exchange (NYSE) and its historical data on the limit order book that was previously unavailable to the public.

Through detailed study at both aggregate market level, and individual stock level, they even discovered that market liquidity can be predicted from the information in the limit order book.


Liquidity beyond best quote posted

In the past, the only information about the market available was the best quote. Best quote is the highest buying price or the lowest selling price for a particular stock.

Without information about the second best, or the third best quote, it was difficult to ascertain just how liquid the market was.

The authors found that by looking at a series of quotes following the best quote, they were able to ascertain the liquidity of the market. They also found that the limit order book provides reasonable liquidity for large-size market-order trading.

More interestingly, the authors found that they were able to predict market liquidity using the methods they described in their research.


Future research

The authors suggested that future research could seek to better understand the variation of the liquidity provided by limit order book on an intraday basis. With the data set used in their paper, this will be feasible.

They also felt it would be interesting to look deeper into a theoretical understanding about how volatility affects limit order traders’ trading strategy.

The above is an extract from the working paper, “Liquidity Beyond the Best Quote: A Study of the NYSE Limit Order Book”. Dr Yeo Wee Yong is an Assistant Professor with the NUS Business School. He obtained his PhD in Finance from the Indiana University (Bloomington) and co-wrote this working paper with fellow colleague at the NUS Business School, Assistant Professor Kang Wenjin, who obtained his PhD from the Anderson School of Management, UCLA.


Why Does Liquidity in Financial Markets Dry Up?


In the event of a large market decline, we often observe that the liquidity in financial markets also dries up. Why does this happen? Professor Allaudeen Hameed and his co-authors investigate the impact of fall in aggregate market valuations on various dimensions of liquidity and find that liquidity is significantly affected by large market declines.

Liquidity refers to the ability to buy or sell a security quickly without significantly impacting its price.

For example, if a seller needs to absorb a significant loss in value in order to sell an asset immediately, then the asset is relatively illiquid.

In many active stock markets, market makers (or other specialists) provide liquidity by accommodating trades initiated by buyers and sellers.

Although stock market investments are more liquid than investments in real estate, Prof Allaudeen and his co-authors observed that liquidity in stock markets does go through periodic changes.

For example, a rapid drop in aggregate market prices may lead to a large number of investors wanting to get out of their risky investments. This will cause panic selling.

The large selling pressure (without a commensurate buying demand) for these risky stocks leads to big price impact when they are traded in the equity markets (i.e. low liquidity).

In addition, a dramatic decrease in the market valuation of equities may also trigger capital tightness. This in turn makes it most difficult for market makers to provide liquidity, since liquidity provision also requires (risk) capital.

What Prof Allaudeen and his team found interesting was that when large market declines in equities, there was an increased imbalance in buy and sell orders. There was also a flow of funds out of the equity mutual funds (demand for liquidity effects) and effects of reduction in supply of liquidity due to capital constraints in the funding market.

“Market makers and other financial intermediaries are liquidity suppliers to the market. When they withdraw from the market due to capital constraints, and have to unwind their long positions in equities, they become demanders of liquidity,” explained Prof Allaudeen.

These, and other findings were discussed in his working paper, Stock Market Declines and Liquidity, co-authored with fellow NUS Business School faculty Assistant Professor Kang Wenjin and Professor S.Viswanathan of Fuqua School of Business, Duke University.


Return to liquidity provision

Does the return to liquidity provision change with respect to changes in asset values?

Prof Allaudeen and team used the idea that short-term stock price reversals following heavy trading reflect compensation for supplying liquidity, to devise a simple equity trading strategy.

They show that their trading strategies based on limit-order yield statistically and economically significant risk-adjusted average returns of between one and two percent per week.

And this is during periods of large market declines.

These findings imply that the returns to supplying liquidity rises significantly following periods of large fall in aggregate stock market values, consistent with the prediction that the drop in liquidity is related to supply effects.

The Head of Finance of NUS Business School also pointed out that on average, illiquidity effect in the equity market lasts between one to two weeks.

“We interpret our results as indicative of the presence of supply effects arising from capital constraints even in liquid markets like US equities, although capital does flow into the market fairly quickly,” summed up Prof Allaudeen.

Professor Allaudeen Hameed is Professor of Finance and Head of NUS Business School’s Department of Finance. He received his doctorate in finance from The University of North Carolina at Chapel Hill. His research interests include return-based trading strategies, and liquidity in financial markets. The above article is an adaptation from his working paper “Stock Market Declines and Liquidity”.



How China Succeeds Without a Developed Financial System?


Most findings in the law, institutions, finance, and growth literature show that the success of an economy depended on a well-developed legal or financial system. But for China, even without a well-developed legal or financial system, its private sector is driving one of the fastest growing economies in the world. In this article, Assistant Professor Qian Meijun explains this unusual phenomenon.

China is no doubt one of the fastest growing economies in the world today. Among the three sectors in China – state, listed and private – it is the private sector that has been growing much faster and contributing to most of China’s economy.

And this is in spite of relatively poorer applicable legal protection and standard financing channels in the private sector.

How can this be when most research work point to standard corporate governance mechanisms and financing channels as determinants of success of an economy?

“For China, the success of the private sector suggests there exist effective alternatives to financing channels and corporate governance mechanisms,” said Asst Prof Qian Meijun, referring to the findings in her paper Law, finance, and economic growth in China”published in the Journal of Financial Economics.

The paper was co-written with Professor Franklin Allen of The Wharton School, University of Pennsylvania, and Associate Professor Qian Jun of Boston College’s Carroll school of Management.

Earlier studies have shown that certain trader organizations in China as far back as the 11th century were able to overcome problems of asymmetric information and the lack of legal and contract enforcement mechanisms. This is because they had developed institutions based on reputation, implicit contractual relations, and coalitions.

A parallel can be drawn to what works in China’s private sector today in terms of how firms raise funds and contract with investors and business partners.


China’s social values and beliefs

Cultural and religious beliefs on the development of institutions, legal origin, and investor protection are important factors in an economy’s success.

It has also been demonstrated that a managerial reputation effect can replace formal governance in an IPO firm. This is consistent with the evidence from the Chinese venture capital industry.

“The above factors are of particular relevance and importance to China’s institutional development. Without a dominant religion, one can argue that the most important force shaping China’s social values and institutions is the set of beliefs first developed and formalized by Confucius,” remarked Asst Prof Qian.

This set of beliefs clearly defines family and social orders, and are very different from western beliefs on how legal codes should be formulated and how individuals and businesses negotiate.


Reputation and relationships

In China, only those firms that have the strongest comparative advantage can survive and thrive. This can be explained by entry barriers, which are a relevant factor for the growth of China’s private sector as lower entry barriers foster competition.

Yet, there exist non-standard methods to remove entry barriers in China.

“For example, to ease the problem of application for a business license because of government bureaucracy, most of the firms’ founders or executives ask the friends of government officials to negotiate on their behalf, or the firms can offer profit sharing to government officials,” cited Asst Prof Qian.

This alternative mechanism based on reputation and relationships provide the most important support for the growth of the private sector.


Cooperation among suppliers

Alternative effective corporate governance mechanisms in place also contribute to the private sector’s success.

Studies have shown that if cooperation among different suppliers of inputs is necessary and all suppliers benefit from the firm doing well, then a good equilibrium with no external governance is possible, as internal, mutual monitoring can ensure the optimal outcome.

In fact, such trade credits are an important form of financing for firms during their growth period.


Profit sharing

Further, the profit sharing model adopted also makes it an incentive compatible for officials at various levels to support the growth of the firm.

The common goal of sharing high prospective profits can align interests to overcome obstacles and achieve their common goal.

“Under this common goal in a multi-period setting, implicit contractual agreements and reputation can act as enforcement mechanisms to ensure that all parties fulfill their roles to make the firm successful,” commented Asst Prof Qian.


Comparing China

When comparing China to other transitional countries such as Russia, Vietnam and Eastern European countries, Asst Prof Qian believed that there is a difference as China’s economy is much larger and more diversified than other transitional countries, with the exception of Russia,

“With a small and homogenous economy, a country can adjust its legal and financial systems to the strengths of its economy much easier than a large country like China can.”

The success of China’s Private sector demonstrates alternative mechanisms can work wonders even in large and diversified economies.

“For fast changing economies, alternative mechanisms may work better,” said Asst Prof Qian.


In a nutshell

With one of the largest and fastest growing economies in the world, China’s experience differs from most of the countries studied in the law, institutions, finance, and growth literature, and is an important counter example to the existing beliefs.

The system of alternative mechanisms and institutions plays an important role in supporting the growth in the private sector, and they are good substitutes for standard corporate governance mechanisms and financing channels.

Going forward, Asst Prof Qian commented that the results of her team’s findings posed questions for both researchers and policy makers and suggested that much more research is required in order to better understand how alternative mechanisms work where standard mechanisms are not available or not suitable.

“There are important factors connecting law, institutions, finance and growth that are not well understood. A better understanding of how these alternative mechanisms work to promote growth can shed light on optimal development paths for not only China, but also many other countries. At present, it is not clear if established mechanisms give rise to growth in an economy, or it is the growth of an economy that gives the demand for established mechanisms.”

Dr Qian Meijun is currently an Assistant Professor with NUS Business School. She joined the Department of Finance & Accounting on 6 July 2006 after receiving her doctorate in finance from Boston College’s Carroll School of Management. Her research interests include mutual fund governance, performance evaluation, and law and finance. The above article is an adaptation from her paper “Law, finance, and economic growth in China” published in the Journal of Financial Economics Vol. 77 (2005) 57 – 117.



Can Firms Use Hedging Programs to Profit from the Market?


The literature on corporate risk management has traditionally assumed that derivative securities are fairly priced on average, so that firms could not systematically exploit unusual market conditions and earn positive returns from their hedging transactions. Here, Associate Professor Tim Adam questions this basic premise on which corporate risk management literature is founded and reveals two key findings.

Incorporating a market view into a corporate risk management strategy appears to be a widespread phenomenon.

In a survey of 244 Fortune 500 firms, almost 90% of the firms based the size of their hedges on their market views. In another separate survey on derivatives usage by 399 US non-financial firms about 50% of firms admit to sometimes altering the size and/or the timing of a hedge due to managers’ market views.

The gold mining industry appears to be no exception in this regard.

Recognizing this, Professor Adam asked: can managers create value by hedging selectively, i.e., varying the size and timing of their hedging transactions based on their market views, perhaps shaped by private information? Can managers create value by exploiting systematic patterns and anomalies in derivatives markets?

To answer these questions Prof Adam analyzed the quarterly gold derivatives positions of a sample of 92 North American gold mining firms from 1989 to1999. This data, together with market data on average gold spot and futures prices, interest rate, and the gold lease rate, permitted the calculation of the quarterly net cash flows associated with each derivatives transaction for each firm.

These derivatives cash flows were then compared with several benchmarks to determine whether firms are making or losing money using derivatives, and what the sources of these gains or losses were.


Study Findings

During the sample period, there were two major gold price trend reversals: Gold prices generally fell from 1989 to 1993, then increased until 1996, and continued to decline until 2000.

Prof Adam found that firms that hedged their gold production during this period generated large positive cash flows. These firms realized an average total cash flow gain of $11 million or $24 per ounce of gold hedged per year, while firms’ average annual net income was only $3.5 million per year.

The source of most of this gain was a positive realized risk premium, i.e., a persistent positive spread between the contracted forward price and realized spot price. The positive realized risk premium was not special to the particular sample period, but had existed in the gold market since the late 1970s.

Thus, this finding highlighted a new motive for corporate hedging, which the literature had previously ignored.

There was considerable evidence that managers were incorporating their market views into their risk management programs. This caused excess variation in firms’ hedge positions that cannot be explained by changes in firms’ fundamentals.

In contrast to the first finding, however, firms did not realize economically significant cash flows by hedging selectively. The additional cash flows generated by deviating from a benchmark hedging strategy were either zero of economically insignificant. <

Consistent with this result, firms were unsuccessful on average in predicting the gold price trend reversals and adjust their hedge ratios accordingly.

Prof Adam thus concluded that managers had no market timing ability and attempting to speculate in this way created no value (and probably destroyed value) for shareholders.

This finding was in stark contrast to the widely held view among corporate executives that market timing was an integral part of a hedging program.

Even though gold mining firms as a group did not outperform the market, it could be that there were persistent winners and losers within the group.

However, no evidence of persistence was found.

In most cases, a positive selective hedge cash flow in one quarter was generally not followed by another positive selective hedge cash flow in the next quarter.

Furthermore, the selective hedge cash flows were not correlated with firm size, with how much firms hedge or the frequency with which firms adjust their hedge ratios.

Thus, consistent with the efficient markets hypothesis, managers were not able to outperform the market.


Can Managers Create Value?

Between 1989 and 1999, gold mining firms were able to benefit from a persistent positive risk premium in the gold market.

During this time firms’ derivatives positions generated significant value of shareholders.

This finding is important for future empirical studies that aim at measuring the benefits of corporate derivatives use.

These benefits may not only arise from the alleviation of certain financial frictions and market imperfections that individual firms face but also stem from the presence of unusual market conditions.

Since risk premia have been documented in a wide range of currency and commodity markets, there is no ex ante reason to believe that the results in this study are unique to the gold market.

There was no convincing evidence that firms consistently outperform the market by hedging selectively.

Firms’ selective hedge cash flows are zero on average. Furthermore, there were no persistent winners and losers, and there were no significant cross-sectional differences between winners and losers.

These results indicate that although gold mining firms appear to speculate a lot, this does not translate into economically significant derivatives cash flows that could be attributed to successful market timing.

So, can managers create value by exploiting systematic patterns and anomalies in derivatives markets? Can they create value by hedging selectively?

The answer to the first question is “yes” and to the second is “no”.

Associate Professor Tim Adam is currently with NUS Business School, Department of Finance and Accounting. He obtained his PhD in Economics at the University of Virginia and received several teaching awards, including twice the Franklin Prize of Teaching Excellence. His areas of interest include corporate risk management, corporate restructurings, corporate finance, and derivatives, and he has published several papers on these topics. The above article is an excerpt from his paper, “Hedging, Speculation, and Shareholder Value” co-authored with Chitru Fernando and published in the Journal of Financial Economics in 2006.



Service Innovation: Converting Pareto Loss into Revenue


Consumers’ choices depend on the net value they get after taking into account both monetary and non-monetary costs incurred from the purchase. Associate Professor Irene Ng, who graduated with a PhD from NUS Business School in 2003, explains how the identification and the converting of Pareto losses, coupled with the use of technology, will enable firms to innovate and increase price, demand and customer satisfaction.

Traditional business thought has it that price is the only and critical avenue through which businesses are able to generate revenue. With good pricing and segmentation strategies, firms are more likely to succeed since this would ensure that consumers would be more likely to pay for a good or service. However, today’s consumers do not make purchase decisions based on price alone, but on the net value that they can get from their purchase. This includes both price and non-price considerations.

To enjoy the benefits of a service, buyers are aware that they are required to pay a price, a monetary cost. They are often unaware of other monetary costs involved, especially when consuming a service, or non-monetary costs that may be incurred as a result on purchasing a good or service. For example, when a buyer purchases a gym membership, he or she may incur further monetary costs in purchasing gym gear or car park charges. He or she may also incur non-monetary cost of having to wait to be served by a gym consultant.

Though unaware, consumers may unconsciously process such considerations and the expected net value (ENV) outcome may result in the decision of whether or not to purchase the service. Consumers too may decide not to purchase if they find themselves incurring other non-monetary costs such as time, feeling uncomfortable, being vulnerable to risk or opportunity costs.

Clearly, consumers do not just consider price as the deciding factor for purchase. There is thus a need for a revised understanding of the key economic concepts relating to price.


Service Innovation and Pareto Loss

Pareto Loss is defined as the non-monetary costs incurred by buyers. Simply put, Pareto loss benefits no party. Neither the consumer nor the firm benefits from it. By waiting, neither the consumer nor the firm benefits. In fact, it could even lead to a loss for the firm since the consumer may give up buying the service, or demand ‘compensation’ for having to wait, such as demanding a lower price for the service.

By understanding the concept of Pareto loss, and being able to identify it, firms can take the opportunity to innovate by converting this non-monetary costs incurred by buyers to higher revenue through increased price, increased demand or improved customer satisfaction.

To increase revenue, firms can attempt to reduce customer’s non-monetary outlay and increase the price accordingly, maintaining the ENV and therefore retaining the number of customers in the market for the service. An example would be dry cleaning services, where customers willingly pay a higher price for an express (quicker) service or speedy boarding for low cost airlines, where customers pay to reduce waiting or to be able to choose their seats.

Alternatively, the firm can benefit from an increase in demand by reducing the non-monetary outlay and not increasing the price of the service at all. By doing so, the ENV increases and this may entice more customers to purchase the service. For example, mothers shopping at IKEA are able drop off their children at a well-designed and well-managed daycare with lots of activities for kids and this attracts them to shop at IKEA as it would reduce the difficulty of managing children (a non-monetary outlay) while shopping for furniture.

Today, technology allows firms to also convert Pareto loss into higher level of satisfaction for firms. Customers who have little time to go to the bank or the post office can now do their banking or bill payments online. When there is uncertainty as to whether there is enough snow at ski resorts, a webcam and a half-hour report on slope conditions available on the Internet provides tremendous value to the skiing customer.

Even without technology, innovative firms have identified some non-monetary costs that many of us would gladly ‘buy’ our way out of. For example, we are able to hire a personal concierge to help with errands that we might not have time to complete. As WCBS TV reports, “Time is so precious, and this is a way to buy time.”

One of the reasons why technology has been a key driver in the servitisation of the economy is because it allows more Pareto losses to be converted to revenue-generating service businesses. This in turn, raises productivity levels across the board and as economists like to observe, increases consumption that would further stimulate the economy. Buyers’ needs today are more complex, with a greater demand on time. Yet, the key driver isn’t merely technology, but our need for more time, greater convenience and less risk.

Thus, when firms convert Pareto loss into a service, whether chargeable or not, it results in greater customer choice and satisfaction.



The explosion of pricing strategies of recent times has also been very much technology-led. Channels of purchase have increased tremendously over the past 20 years with more ways than ever to sell and deliver services. With the proliferation of sales and delivery channels, service entrepreneurs and innovators are able to discover ways and means to uncover latent need for convenience and time, and meet them in innovative ways.

Consequently, buyers can now purchase through a channel that is most conducive for them, i.e. the channel that gives them the greatest value. Since buyers now determine their purchase decisions by considering both monetary and non-monetary costs, different Pareto losses exist for different channels. Converting such Pareto losses would give rise to many permutations in terms of pricing.

With markets now being divided into finer segments, leading to the term micro-segmentation, it is now possible to price for each of these micro-segments and therefore allow firms to refine their revenue management strategies. With third generation mobile telephony, TV on the web, music on the move, convergence of mobile and Internet as well as other technologies, pricing and revenue management strategies have to be clever, creative and innovative. Otherwise, firms that are any less dynamic run the risk of being left behind.

Dr Irene C L Ng is an Associate Professor of Marketing and the Director for the Centre for Service Research at the School of Business and Economics, University of Exeter (UK). She was previously the CEO of SA Tours, the largest tour operator in Southeast Asia based in Malaysia, Singapore and China and the founder and CEO of Empress Cruise Lines, a cruise company with a turnover of $250m per annum.

The adapted article was an excerpt from one of the eleven strategies in her book, “The Pricing and Revenue Management of Services: A Strategic Approach”.

More on her other strategies can be found in her book located at



“In today’s context, technology allows firms to turn Pareto loss into higher revenues for firms through service innovation.”

Related Articles



Marketing in a Global Environment


With the advent of faster communication, transportation and financial flow, the world is virtually shrinking and firms are often confronted with challenges on whether they should market their products or services in a globalized environment. In the article below, Andrew Ng shares what it takes to be successful in marketing their products and services in the global arena.



Researching on the environment, culture and people in the markets you plan to venture into, is a key step to business success in a global arena. Most firms falter because of the lack in research on the relevant information in the targeted areas, or are simply too contented with the generic data collated, which may fast become obsolete in this ever dynamic and changing world.

Therefore, there is even a greater need to secure current real time market information either through one’s organization or a separate professional entity to facilitate useful, up-to-date information for decision-making.

These current real time market data that could only be obtained via field research, is most critical for decision-making. Firms should focus on the gathering of such data by either deploying resources to conduct field research and feasibility studies, or engaging experienced consultants to jump-start the whole process. While such practices are relatively common in the Western firms, Asian firms tend to adopt a “Rambo” mentality of handling everything on their own.



Staffing the team with people who are adaptable, culturally sensitive and possess an affinity for the targeted country is equally important. For a company to flourish, it must be able to face up the real challenge of discovering people with the right skills, experience, passion and interest. The employment of such people will enable the firm to advance further on the road to business success.

A firm will always want to have people who are adaptable, adventurous and possess a can-do attitude. This person should also be able to look out for tell-tale signs and warning signals which may require remedial action to fire-fight unplanned scenarios – A regional director for the Middle East was re-assigned elsewhere when his boss discovered that he was regularly shipping instant noodles from Singapore to supplement his regular diet as he had never gotten use to the local food.

“Affinity” for the market/country is another important quality to own. The manager assigned to the job needs to possess this “affinity” and develop a liking for the projects they are responsible for. A manager without the “affinity” factor would generally mean business failure downstream!



By combining the right people with the correct information, firms will be able to craft out the appropriate strategies to address the pertinent issues. It will also make sense to focus one’s effort on either:

  • Emerging markets or those with less competition – “Blue Ocean” type with potentials of good yields but may require more challenging efforts or;
  • Markets that one is familiar with in which one could leverage on his past experience and knowledge.

To summarize, most businesses are conducted in numerous ways that are very much different from what we are familiar with in Singapore. This may be due to various reasons such as cultural differences, guanxi, bureaucratic rulings or even the lack of transparencies in the way where businesses are conducted.

Singaporeans tend to think that businesses should only be conducted in “the Singapore way”. In reality, the “Singapore way” is more of an exception than a rule as we are the minority as compared to our neighbouring countries in Asia. Therefore, we need to prepare ourselves to be more flexible, yet savvy enough to make sure we get what we want.

Andrew Ng Choon Teck is an Adjunct Associate Professor with NUS Business School. Armed with over 20 years of regional marketing and business development experience, Andrew Ng is also the current CEO of Greater China Consult, which is a leading consultancy firm that specializes in strategic business development in the China market.



“In today’s context, technology allows firms to turn Pareto loss into higher revenues for firms through service innovation.”

Related Articles



Beyond the Pareto? The New Market of Long Tail


Technological advancements in the 21st century have generated new models and innovations in the sales and delivery of products and services. So what really makes a delivery channel tick in the new century? Here, Adjunct Associate Professor Neo Kok Beng unravels.

In the current context of traditional “market place”, businesses should continue to explore new and alternative channels to complement or replace existing channels of reaching out to the customers. Within the music industry, consumers no longer need to browse limited copies of compact discs (CDs) that are available physically in retail shops. Instead, they can now choose to browse through the Internet to purchase individual songs online. While some retailers continue to operate in the brick-and-mortar mode, newcomers have capitalized on the power of “market space” to reach out to the global market. One such supporting example will be the prevalent use of Apple’s iTunes by consumers to browse, purchase and download songs.


The Pareto Principle

The Pareto principle, commonly known as the 80-20 rule, is a common rule-of-thumb used perennially in business. In short, it means that 80% of the effects are often resulted from 20% of the causes. As a result, marketers will usually monitor the top 20% of products or services that contribute to the revenues and focus on allocating more resources to push for these products. To the retailers, it will spontaneously mean allocating more shelf space for “top 20” products.


The Long Tail Theory

Chris Anderson, Editor-in-chief of Wired Magazine, coined the term “long tail”, a phenomena predominantly observed in the entertainment and media industries, to explain why non top-sellers items are made commercially available online to generate a sizeable market as oppose to the top-sellers. This is shown in his research on online music retailer Rhapsody, where 40% of the downloaded tracks in December 2005 are not available in retail stores.

Anderson also identified 3 forces that created a new set of opportunities in the market space. The first, is the force of “democratize production”, one which is the direct result of the use of new tools which subsequently facilitated the production of digital tools such as the digital cameras. The second, is the force of “democratize distribution”, one that creates online shopping opportunities for customers to browse and purchase. The third, is the force of “supply & demand connections”, one that taps into the distributed intelligence of millions of consumers that gathered together as a community to share and exchange information.


Scarcity versus Abundance

In the physical world, organizations are always limited by physical constraints. The scarcity of resources and the ever-inherent costs often limit the choices offered by the companies to its customers. These constraints however are not applicable in the online space as companies can make any good or service abundantly available with little or no limitations placed on costly physical space. As such, online organizations will in turn be able to open up and offer a lot more.

The question however, remains on how companies that operate in a physical space can leverage on the long-tail phenomena. Should they continue to play the role of aggregators to provide a one-shop-for-all products? Or should they tap extensively on information intermediaries such as Google or Facebook as alternative channels to reach out to the customers?  Whatever their strategies might be, it is going to be a tough decision to make in order to pave the way ahead for businesses to flourish in an inter-connected world.

Adjunct Associate Professor Neo Kok Beng teaches technology entrepreneurship at the NUS Business School. He is the Founder of NeoCapital Group, an innovation-development catalyst and accelerator that incubates high-growth technology-based companies for the global markets, and is Founders/CEOs of companies such as AWAK Technologies (wearable kidney), Nextwave Biomedical (mobile healthcare) and HASu Media (GPS-bases social networking platform).



“In the physical world, organizations are always limited by physical constraints. The scarcity of resources and the ever-inherent costs often limit the choices offered by the companies to its customers.”

Related Articles




Health Claims Labels: How to Market to Skeptical Consumers


Marketing using health claims such as ‘calcium is good for your bones’ is not an uncommon sight. However, Singaporean consumers, like their Western counterparts, are becoming skeptical about such claims that appear on food packaging. Age and consumer’s self-confidence in acquiring information, identification of product alternatives, and getting recognition from others about purchase decisions made, are important antecedents to Singaporeans’ skepticism toward health claims.

What contributes to consumer skepticism about health claims, and what are the consequences of such skepticism? Here, Associate Professor Tan Soo Jiuan breaks it down for us.

In the European Union, health claims that are governed by the Health and Nutrition Claims Regulation was supposed to take effect in the autumn of 2006. This regulation will eventually contain a list of approved well-established health claims such as ‘calcium is good for your bones’, which manufacturers may place on product labels ‘so long as they are proven to apply to the food in question.’

The regulation was timely as many food manufacturers in Europe are placing health claims in prominent places on product packaging to inform customers of the potential health benefits of their products. Despite the prevalent use of health claims in marketing, interviews conducted by FDA revealed that consumers are highly skeptical of health and nutrition claims on packages because they view claims as attempts by the manufacturer to sell more of their product.

If consumers generally do not believe health claims touted on product labels as reported, why are marketers still developing and communicating these claims on product packages? What is the nature of such skepticism? What contributes to consumer skepticism about health claims, and what are the consequences of such skepticism? Will extant skepticism concepts developed based on Western consumers be applicable to Asian consumers?


Examining Consumers’ Personality and Experience

To answer the above questions, a framework adapted from Obermiller and Spangenberg’s Skepticism toward Advertising1 was used. Personality Traits (cynicism and consumer self-confidence) and Consumption Experiences (age and education) were used as the two main antecedents to consumers’ skepticism toward health claims.

As part of the adapted framework, Situational Factors (product type and claim type) as well as Individual Factors (knowledge/expertise on nutrition, and motivation/involvement to process nutrition knowledge) were also considered, as they were known to moderate the effects of skepticism on the use of health claims.

With the designed health claim skepticism framework in place, the study revealed that personality traits such as self-confidence (in information acquisition and processing, consideration set formation, social out-comes decision making, and persuasion knowledge) and consumption experience such as age contributed much towards molding a person’s skepticism toward health claims.

Through the survey, it was discovered that Singaporean consumers, like their Western counterparts, are indeed skeptical about health claims on product labels. Personality trait in terms of consumer self-confidence, consumption experience in terms of age, and individual factor in terms of motivation to process nutrition information are found to be important antecedents to Singapore consumers’ skepticism toward health claims.

This also means that Singaporean consumers who are high in skepticism will use less of the health claims and millions of dollars spent on product development and improvement, advertising, and packaging would be wasted!


How marketers can reach out to the skeptic

However on the other hand, if skepticism is high, marketers may then consider appropriate marketing communications to educate these consumers and convince them of the validity of the health claim. Companies can seek endorsement of their claim by independent and qualified parties to deal with consumer skepticism. For instance, Kellogg Company cited the Heart and Vascular Institute at the Henry Ford Hospital as the authority for their ‘Heartwise’ claim, and such endorsements acting very much like the seals of approval could be a potent marketing factor.

Alternatively, marketers could also consider revising the health claims and test out the acceptability of the revised health claim messages using the skepticism scale as a response instrument. Different types of health claims (specific versus general) with variations in wordings could then be pre-tested among targeted consumers, to find one which invited the lowest level of skepticism and hence one which has the most potential for acceptance by these consumers.

In conclusion, global marketers involved in food and health related products should seek to understand how consumers worldwide process nutrition and health-related information. With that, they will be able to design product information on packages that consumers could accept, process, and use in their purchase decisions.

Associate Professor Tan Soo Jiuan, is a lecturer in the Marketing Department at the NUS Business School. A full publication of the above report, ‘Antecedents and Consequences of Skepticism toward Health Claims: An Empirical Investigation of Singaporean Consumers’ may be found in the Journal of Marketing Communications, 13:1, 59 – 82.

1 Obermiller and Spangenberg, 1998, Journal of Consumer Psychology, 7(2), 189 – 186.


Related Articles



Digital Connections


The Internet today is one of the most important sources of information with over 800 million people using it every day. But with the introduction of Web 2.0 technology, more so have begun to look to it as a resource for entertainment, a means of instant communication, an exchange platform for business transactions and a non-intrusive way to extend one’s social network.

Blogs, podcasts, RSS feeds, instant messaging and social networks such as Facebook, Linked-in, Friendster and MySpace are such Web 2.0 approaches that have burst into the Internet world in recent years, each targeting and competing for its share of audience. Companies too, in keeping up with the latest trends, and finding some of these tools useful to better customer satisfaction or to increase efficiency, have begun to incorporate these approaches on their portals.

While creators of such technology continue to churn out application after application, end-users are already appreciating the east, convenient and results it brings.

In today’s digital world, the PABX system has become irrelevant as companies such as Reuters use their own version of secured instant messaging to allow its clients to trade efficiently. On the education front, teachers in schools have begun to use portals to share and exchange teaching resources. Most amazingly, social networking tools such as Facebook has been able to re-connect people they have lost contact with over years!

In the same way, the NUS Bizalum portal has infused some of these Web 2.0 approaches so that alumni can connect, network and exchange easily and conveniently on the online platform. The E-Groups feature, for example, is able to connect alumni with similar interests together, Whether one is interested in entrepreneurship, marketing or finding a potential employer, the feature allows members of each group to discuss issues, post comments and even photos pertaining to their interest.

“I constantly update my profile on E-Groups so that alumni looking for a potential hire can see my profile and contact me if they find me a suitable candidate,” reveals current MBA student Mr Srikanth Sridharan.

Alumni can also get connected with fellow classmates who have graduated through the Alumni Directory that allows one to search for friends whom they have lost contact with.

For those who wish to keep updated on the latest business approaches, the Life-Long Learning feature allows one to learn from distinguished speakers through videos and excerpts of academic articles online. It being online also means they can access the information anywhere, anytime.

“I find the Life-Long Learning feature really good, and I look forward to more of such articles and conference-based videos,” says alumnus Mr Steven Yeo (APEX MBA 2005) who travels often.

Specially created to promote mentor-mentee relationship, the Mentor Cafe is a platform created to bridge the gap between alumni and current students. The platform also allows alumni (volunteer mentors) to provide professional and industry guidance to current students (mentees). This exchange will in turn allow students to interact with industry experts to gain real-world perspectives and complement classroom learning.

The newly developed portal will be adding even more Web 2.0 features so that alumni can look forward to a richer platform for exchange.

Adds Mr Srikanth, “With more people joining the community, I’m sure it will be the alternative venue for all past and current NUS Business School students to interact!”

Indeed, Web 2.0 has changed the way we communicate and connect today. With the many benefits it brings, end-users really have much to smile about.

Be a part of NUS Business School Alumni’s online community by signing up here!

Business Strategy



Business practitioners themselves, the alumni give us an overview of what a business strategy entails, while we learn if having a business strategy is all is needed to business success from Professor Kulwant Singh, Interim Dean of NUS Business School. Visiting Professor Will Mitchell and Associate Professor Andrew Delios then provide useful pointers on developing strategies in a changing environment and using acquisition as an internationalization strategy.

Perspectives on Business Strategy

Leadership the Key to Strategy Success?

Strategy in a Changing Environment

Acquisition: A Key to Success in an Internationalization Strategy