THE PRICE OF ART

ABSTRACT

How do prices for contemporary art come into being? Buyers of contemporary art face a problem of fundamental uncertainty, because what passes as quality is difficult to determine, and buyers can hardly estimate how a specific piece of art will perform as an investment. Since a market for contemporary art presupposes the possibility of at least limited rational purchasing decisions, uncertainty must be reduced. We argue that the value of an art work or artist originates in an intersubjective process of assessment and conferring of reputation by experts in the art field, such as gallery owners, curators, critics, art dealers, journalists, and collectors, who help establish the artistic reputation of a work or an artist. The quality signals emerging from the art field enable buyers to assess the economic value of art works. We tested this initial hypothesis against two datasets containing data on art prices and information from the biographies of artists.

Keywords:

• price formation
• art markets
• culture
• uncertainty

Notes

¹The sociology of markets has two dominant theoretical approaches: the network approach (Burt 1992; White 2001, etc.), which focuses on the structure of relationships between market actors (individuals, organizations), and the institutional approach (Fligstein 1996, 2001, etc.), which gives priority to the role of rules, habits, conceptions of control, law, and governance structures. Both approaches agree that the restriction of competition and the consequent enabling of ‘stable worlds’ (Fligstein 1996: 658) must be recognized as prerequisites for markets to develop.

²Indeed, art buyers from the modern period and earlier also relied on the judgments of experts, who estimated the authenticity, provenance, quality, and condition of each object.

³The primary art market is where an artwork is sold for the first time. Usually a gallery makes this sale based on a set price, which, however, is subject to negotiation. The secondary art market refers to the resale market for art works, usually through an art dealer or at auction (Velthuis 2011).

⁴This research project was funded by the Fritz Thyssen Foundation.

⁵A table with the complete set of variables used can be obtained from the authors. Price per square centimeter was chosen as a variable instead of price per work because galleries price the works they sell according to size (see Velthuis 2005).

⁶There is an extended literature on the relationship between art markets and stock markets (see for example Worthington and Higgs 2004). The returns on alternative investments are included only as a control variable in this paper.

⁷Because of extremely high collinearity between some of the reputation indicators in the auction price model we had to leave out the variable ‘number of solo exhibitions’.

⁸Price lists differ from real prices because galleries frequently give discounts to their customers. The amount of these discounts depends on the demand for the artist and the importance of the buyer for the gallery. As a rule of thumb, we can assume discounts of 10%. Higher discounts are rather infrequent (cf. Velthuis 2005).