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Interesting paper by Olav Velthuis
Promoters versus parasites : Art dealers, auction houses, and the contested potential of art as an investment
Abstract:
This paper investigates the performance of art as an investment good. In doing so, the paper diverges from the extensive literature in cultural economics, which has compared the rate of return on investing in art to rate of returns on ‘ordinary’ portfolio’s consisting of stocks and bonds. The main aim of the paper is twofold: first of all, to contrast the behavior of dealers on the primary market for art, and auction houses on the secondary market. I show that the activities of auction houses are by and large limited to matching supply and demand, while focusing on single works of art rather than artist’s careers; art dealers on the primary market, by contrast, are invested in establishing a market for an artist; they develop long term relationships with the artists they represent, and actively promote their careers. I argue that the dealer’s pricing decision on the primary market, which serves to lend structure to the market, is part of this attempt to establish a solid market. Also, by trying to control the ‘biography’ of artworks that leave their gallery, dealers seek to limit the possibility of future resale, and thereby the potential of investing in art. Paradoxically, they aim at establishing a market by limiting rather than enhancing its liquidity.
The second aim of the paper is to provide a tentative explanation for the existence of price differences between the primary and the secondary segments of the art market. From an economic perspective, it is expected that the price level for similar works by the same artist should be roughly equal at auction and in the gallery. If a difference in price occurs between both market segments, rational actors instantaneously respond by arbitrage. This process of ‘buying cheap and selling dear’ continues until auction and gallery prices end up at the same level. Nevertheless, empirical research has shown that price differences are endemic on the art market. I argue that auction and gallery prices not only differ in quantitative, but also in qualitative respect; these qualitative, substantive differences between gallery and auction prices partially prevent arbitrage from taking place, and produce price stickiness; thus, a so-called price dispersion equilibrium may emerge….
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