In this paper, we presented a Nash bargaining model of the private art market in which the new artworks are traded, to explain its functioning and characterize the main relationships between the agents that operate in this shadow market. In our model, the artist creates the artwork and sells it in the primary market, in which insider collectors and galleries operates; the insiders can resell the artwork to the gallery in the secondary market, and the gallery can resell it, both in the secondary and in the tertiary market, to the outsider collector, depending on the market in which the artwork has been bought; all these agents, besides the outsider collectors, can also sell the artwork in the public market, through the intermediation of an auction house.
Using the bargaining selling method as actual price mechanism formation in art trades, we represent the agents’ simultaneous
choices through the market channels in the private art market of new artworks. In particular, we identified a set of bargain equilibrium prices in each possible market channel. All the equilibrium prices are path-dependent and are positively af-fected by any increase of the market powers of the agents in the path in which the price is observed.
With our bargaining games, we can fully characterize the mar-ket conditions for which an artwork ends up to be sold in a gallery or at auction, eventually with the intermediation of other agents, as an insider collector, too. In this way, we defined the artist’s optimal incentive in creating a new artwork, since she is able to perfectly identify the private price at which her artwork will be sold. Furthermore, we are able to explain both the role of the gallery in the price formation in the private market and its incentives to operate in the art market.
Our setting provides an ideal framework of this market that could be used to test the efficiency of the Artist Re-sale Rights (the royalty an artist could receive when her artwork is resold through a dealer), as well as other public interventions in the art market to support one or more agents/paths. When the data will be available on private market, the testable implica-tions of our model could be carried through, not only as an empirical validation of the results, but also as a way to identify the dominant paths in the real shadow art market.
However, our framework can also be adopted to analyze the market of patents, where the inventor would take the role of the artist, the gallery would be replaced by a patent broker, the auction house by the agents who sell the patents in auction, that are recently emerged in the market of the intellectual
prop-erty,17while the insider and the outsider would be replaced re-spectively by a more and a less informed firm.
17For an analysis of patent brokerage firms, intellectual property auctions, and other intermediaries in the intellectual property market, see Hagiu and Yoffie (2013).
Value and information in the art market: A
behavioural pricing model
Talking about prices in the art market should be done consid-ering the role that information and value play in the artworks’
price-formation mechanism. Many scholars from humanities vastly studied the value issue in the art, and the information issue in economics has been addressed even by Nobel prizes;
however, when humanists study the value of cultural goods they often neglect the asymmetric information issue among the agents, while when economists study the information asymme-try question they usually ignore the role played by the cultural
value in the cultural goods’ market.
In fact, cultural goods have the peculiarity to embody both a cultural and an economic value, and the agents that operate in the cultural goods’ markets usually have a different level of available information on these two values. Hence, the two is-sues are closely related and should not be studied separately.
To date, few cultural economists have considered together the two questions in the same framework, using theories from eco-nomics and concepts from humanities, but always without a pure analytical approach. For this reason, we propose a new theoretical model of pricing, based on Chapter 2, to take into account both the information and value issues in the cultural goods’ market. Starting from the artist’s choice about selling her artwork, we model the relationships among the galleries’
and collectors’ actions in the private market depending on the information at their disposal and on their ability in evaluating the cultural and economic value of the artwork itself. In par-ticular, using a bargaining theoretical framework developed by Wu (2004), we analyze two of the channels of the private art market we proposed in 2, through which the new artwork cre-ated by the artist may reach a collector with the intermediation of a gallery, and study what is the role of information and value in the formation of the price of an artwork in these channels.
The remainder of the paper is organized as follows: in Section 3.2 we present a detailed literature review on both value of cul-tural goods (Subsection 3.2.1) and information asymmetry in cultural goods’ markets (Subsection 3.2.2). In Section 3.3, we briefly summarize the results of the model from 2 and in Sec-tion 3.4 we develop the new model considering both artist’s tal-ent and fame and information issue on quality of the artworks.
In Section 3.5 we discuss the main results of our model. Section 3.6 concludes the paper.