“Haggling for art” is a renowned habit in the art market, though the size of the discount that sellers apply to the price of art-works is not widely recognized.1 For example, gallery owners are willing to negotiate but the discount size is not fully ad-vertised depending on the specific conditions of the sale, and each gallery can handle it differently. Recently, the Wall Street Journal published an article in which Daniel Grant wrote:
1Velthuis (2007) reports various discount policies that galleries apply, as for example the courtesy discount, the museum discount, the flexibility discount, and so on.
When it comes to fine art sold in galleries, there’s the asking price. And then there’s the price most people pay... “Galleries never have sales, it’s con-sidered bad taste”, says Manhattan contemporary art gallery owner Renato Danese. Still most art sold by him, and other dealers, he says, goes for some-thing less than the stated price. There is a certain etiquette to the conversation. “A client comes in and says, ‘I’m interested in this painting’, Mr. De-nato says, and I say, ‘I’m glad that you respond to it positively’. The client asks, ‘What is the price?’ I tell him the price. He says, ‘Can you help me out with that?’ and I may offer 10 percent”. Debra Force, a New York City-based dealer in American art, agrees. “Every work is discounted”, she says.
“I can’t think of an instance in a long time where someone paid the asking price”.2
As a matter of fact, the posted prices is a well-known method of prices formation mechanism, and the haggling for art is still the most used mechanism in the art market where the “spirit of the bazaar economy” is dominant (Arnold and Lippman, 1998;
Velthuis, 2011).
The mechanism on how the price is formed is widely studied in the economic literature within the general framework of the problem of the optimality of the various selling methods. The literature presents mixed results regarding the efficiency of the selling methods (auction, bargaining, and posted price), both from the seller’s and from the buyer’s perspective, and
consid-2See Grant (2013).
ering different level of costs.3
How does the art market work for what concerns the price-formation mechanisms? To answer this question, we need to know what is the selling method actually used by the sellers of artworks and we have to study both the behavior of the agents (artists, dealers, collectors) involved in the artwork trades and their role (as sellers or buyers) in each transaction, that is, what are their relationships with the other agents. In the art mar-ket the selling methods widely used are the bargaining, the posted-price selling, and the auctions. The posted-price mech-anism is the galleries’ preferred selling method, auction is the best-known and most studied mechanism in the economic
lit-3Without auctioning costs, auctioning is always optimal compared to posted-price selling, while, when bargaining costs no more than posted-price selling, the bargaining is always optimal compared to posted-price selling (Wang, 1993, 1995). Bulow and Klemperer (1996) show, under reasonable as-sumptions, that the auction is always preferable to negotiations, but, accord-ing to Bulow and Klemperer (2009), when participation is costly the sequential process is always more efficient than a simple simultaneous auction. Lu and McAfee (1996) identifies a new advantage of auctions over bargaining, since auctions are evolutionarily stable equilibria, whereas in a similar setting, Kultti (1999) shows that auctions and posted prices are practically equivalent. Arnold and Lippman (1998) compare bargaining and posted-price mechanisms in a market with discounting, positive transaction costs, private buyer’s reserve price and buyer’s bargaining ability, stating that a critical value of bargaining ability exists, so that they can establish when the use of bargaining or of a po-sted price results to be optimal. Cason et al. (2003) compare popo-sted-price and bilateral bargaining market institutions finding that efficiency is lower, sellers price is higher, and prices are stickier under haggle than under posted price.
Campbell and Levin (2006) demonstrate that the posted-price rule may outper-form the best possible standard auction mechanism when values are interde-pendent. More recently, Hammond (2010) and Chow et al. (2015), using data for compact discs and real estate sales, respectively, find empirical evidence on the performance of the main selling methods: Hammond (2010) finds that posted-price goods sell for higher prices, while auctioned goods sell with a higher probability; Chow et al. (2015) find that auctioned properties obtain a price premium or suffer a price discount compared to negotiated sales proper-ties, depending on property type and market conditions end properties.
erature, but the bargaining is the actual mechanism at work for art: when galleries post a price or auction houses fix an auction fee, usually, a bargaining process on discounts of posted prices or auction fees occurs between the seller/buyer and the dealer (Ashenfelter, 1989).4
Despite the anecdotal evidence, our research question is still unanswered, since economic theory lacks of a model that fully depicts the role of the selling methods in the art market and provides empirically testable implications of artwork prices. To fill this gap, in this paper we model the functioning of the art market for what concerns the artworks just created and sold for the first time by the artist. In particular, following a game theory approach, we consider the possible channels a new art-work can take to reach, directly or indirectly, an auction house or a collector who will not resell the artwork, and we focus on the relationships between artwork prices and market powers of agents working in a each channel of the market, assuming that agents are price-maximizers with full information on mar-ket powers and reserve prices.5Thus, every time an artwork is auctioned, the artwork is out of the particular framework stud-ied in this paper.
The remainder of the paper is organized as follows. In
Sec-4According to the the TEFAF Art Market Report 2014 edited by Clare McAn-drew, in 2013 48 percent of trades was intermediated by auction houses and 52 percent by galleries. In the domestic markets of developed countries (USA, France and UK) the galleries market share was 55 percent. In Italy, according to the NOMISMA Art Market Report 2013, galleries had a market share of 73 percent, while in the Dutch market the galleries’ market share is of 56 percent (Velthuis, 2007).
5The hypothesis of full information implies that the art goods can be seen as search goods. For an analysis of information asymmetry in the art market where the art good can be either a search, an experience, or a credence good, see Chapter 3.
tion 2.2, we briefly review the relevant literature and empha-size our contribution. In Section 2.3, we introduce the theoreti-cal framework, we solve the model, and we study the effect of the agents’ bargaining power on bargaining prices. Section 2.4 concludes the paper.