By Rieshav Chakraborty 

Abstract

This article discusses the unique economy of the Fine Arts Market where there are more deciding factors to the monetary value than just Demand and Supply such as the cultural significance, the reputation of the artist, its past and predicted monetary value etc. There is an emphasis on understanding the relatively small scale of this industry and its hegemonic actors which predominantly serve the ultra rich. It goes on to address issues with the current structure of the art market which makes it incredibly competitive for emerging artists to make it to the big stage, how art donations can be used for tax write-offs, and how these issues could be mitigated. 

About the Market    

Despite its wide prominence in cinema, literature, social media content and other pop culture representation, the Fine Arts Market is relatively small in size. We should start by the Internet, and markets for sculptures, prints, and photographs, the majority of the market size of this sort of market is extraordinarily consolidated as it refers to a small jar of dealers and auctioneers that cater to an exclusive list of ultra-rich clientele. 

The market size is relatively small, as each year on average $61B of art is sold. Freelance work and smaller creative artists make up a very tiny portion of the market as auctioneers such as Christie’s and Sotheby’s, which facilitate some of the world’s most expensive art, set up for several headliner auctions per year catering to the ultra-rich, auctioning off classic Basquiats, Dalis, and Da Vincis. According to a UBS Report, the amount of art sold in 2020 was a mere $50 Billion. Reiterating again the scale of its bubble, the USA, UK, and China represented 42%, 20%, and 20% of those sale values respectively (since major art auctions are held in cities such as New York, London, and Hong Kong). 43% of art buyers had less than 20 unique buyers in 2020. A study indicated that just five galleries were represented by 30% of the solo shows at US institutions, which are regarded as a sign of success, namely Pace, Marian Goodman Gallery, Hauser and Wirth, Gagosian, and David Zwirner. 

There are two major auctioneers dominating this industry, namely Christie’s and Sotheby’s as eight of the ten highest-priced sales in 2020 were through them. Each auction house has internal specialists that predict the selling price of an item and provide a range, including lower and higher prices. When both parties decide they wish to proceed, the auction house and seller will mutually decide on a reserve price, which is the price below which they will not accept an offer, even if it is more than the lower range of the estimate. To encourage performance, the auction house charges a 2% fee if an item of art sells for more than the high estimate, though this is frequently waived during contract discussions with the seller. Additionally, the seller pays a percentage fee that may be as high as 10% for less expensive works and as low as 2% for more expensive works, however, official figures are rarely published and are highly negotiable because auction houses are keen to attract sellers. The buyer provides the bulk of the auction house’s revenue as they pay an additional percentage fee on top of the sale price. In most Christie’s auction houses, there is a 25% surcharge on sales up to $600,000, a 20% surcharge on sales up to $6,000,000, and a 14.5% surcharge on purchases over that amount. 

What determines the value of art?

The economic model used to operate the art market takes into account factors other than supply and demand. In 1958, some lost copies of Salvador Mundi were sold to Minnie and  Wrren Kurtz for a few dollars. It was inherited and sold around for a relatively low price by a  few owners until it came to the hands of Alexander Parrish and Rober Simon who believed it had a far higher value. After restoration, careful observation, and definitive validation, it was found that it was indeed the original lost work of Leonardo DaVinci, the original Salvador Mundi. The value immediately skyrocketed and they sold the piece for $80 Million, and it was ultimately sold at a Christie’s auction for $405,312,500 to Saudi crown prince Mohammad bin Salman, an all time record price for a piece of art. Therefore, the cultural value of art, its artist, and its rarity plays a huge role in determining the value of a piece. 

Moreover, the monetary value of an art piece is also determined by its past monetary value and its predicted value. That’s the reason it’s considered such a vital investment for the ultra rich. The value of the painting also increases if the artist is deceased. This is a result of scarcity. 

Issues

1. Negligible Intrinsic Value Without Past Information

Most of the issues with the existence of this market are the fact that art doesn’t have any primary intrinsic value. Referring to the example of the Salvador Mundi painting, when a random painting you see on the wall has no label of the artist, no previous price history, and no information beyond the painting, it doesn’t have much of a value beyond what you would pay, impressed by its details and intricacies. The value of the art pieces sold at Christie’s and Sotheby’s auctions are based on the facts of who painted it, who sold it, and who wants to own it. As a result of this, many aspiring artists can lose out. 

2. Hoarders Intentionally Pushing Up the Monetary Value of a Piece

Jose Mugrabi is a businessman and an art collector, who primarily acquires pieces of art made by Warhol as he owns over 800 Warhol paintings. Therefore, whenever a Warhol painting is up for auction, he is usually there and offers bids. In doing so, he ends up either purchasing the painting or making sure the painting reaches a high enough value before it is purchased. Therefore, he either overpays for a new Warhol piece or pushes up the prices otherwise, making sure the market for Warhol paintings is hot, both being a win-win situation for him. This sort of market manipulation is completely legal and happens on a regular basis in the art market. 

3. Tax Write-Offs 

Wealthy people can also donate art to non-profit museums in order for a tax write-off from the IRS. Only a few hundred of the hundreds of thousands of donated works of art are audited by the IRS each year, but even those few reveal a sombre picture. A third of the audited artwork was found to have an average 38% overvaluation in 2018 and 2019. Overall, it was discovered that only 42% of artwork had been appropriately valued, in part due to competing pressures for some to undervalue their artwork when it comes to inherited possession in order to lower the estate taxes that must be paid upon transfer of ownership. A wealthy person who possesses a collection of a particular artist’s work, as is usual, might make additional money from donations because the value of their other art is known to increase when that artist’s work is included in that museum.

Conclusion

As discussed in this article, the Arts Market is a rather special sort of market in contrast to the Securities Market or the Commodities Market, where the value of an art piece is determined by more factors than merely Supply and Demand. 

The Art Market has been around for a long time and is here to stay catering to the elite as an investment which they expect to appreciate in value. However, there needs to be lower barriers to entry so that current aspiring artists get the opportunity to put themselves on the big stage. High barriers to entry is not an ideal system in the Arts Market when the market size in itself is very small.  Moreover, this market needs more transparency as the only time the price of an art piece is public knowledge is at public auctions. It is this lack of transparency which leads to perfectly legal money laundering actions. 

About the author

Rieshav Chakraborty is a 1st -year student at the Jindal School of Government and Public Policy, pursuing BA (Hons) Economics. His research interests include Behavioral Economics, Environmental Economics, and Development Economics.

.Image Source: Matthew Lloyd/Getty Images.