Evaluating the Current Art Market – Part 3 of 5

In the third part of our art market series, we’ll explore the practices of galleries and private dealers. We’ll also address how galleries and private dealers guide and finesse the market to benefit their businesses and their stable of artists. Then, we’ll take a look at how the private market compares to the volatility of the auction sector, and if it’s the solution for increasing transparency in the art market.

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Mysterious Market

The high-end fine art market is shrouded in mystery, generally not easily understood by the novice or average art collector. Some of the mystery is due to the fact that art is subjective; what’s “good art” or “valuable” is also subjective. Due to this subjectivity, art pricing is very different from other investments, such as gold or silver, which have set values; or real estate, which is based on location and square footage and can be easily researched. Instead, there are a lot of vague statements such as “It’s worth it!” and “He’s an amazing artist;” actual prices are hard to discover. Galleries like the mystery because it makes it easier to charge higher prices for that new “phenomenal artist”.

Galleries and Dealers Carefully Control the Fine Art Market

Galleries and dealers require artists to sign representation agreements specifying the artists aren’t allowed to sell directly to collectors. Direct art sales would eliminate commissions, which are the lifeblood of galleries and dealers. Galleries generally do not work with collectors who try to trade pieces of art as though they are stocks being manipulated by day traders. They typically request that items be resold through their galleries, rather than at auction or through a private sale. This not only generates commissions, but also helps galleries to control pricing and protect their artists. If fine art does end up at an auction house, dealers often bid up the items to help maintain the value of their artists.

One of the worst things a dealer can do is set the price for a fine art piece too high, because it can’t be lowered when it doesn’t sell. Dealers may have an overwhelming amount of control over price, but actual collectors typically have a lot of knowledge compared to other consumers; they’re reluctant to overpay. Galleries may cut ties with an artist rather than lower the price of their work, because doing so sends negative messages about the artist’s value, as well as the gallery’s credibility.

Developing New Artists and Collectors

Fine art galleries work hard to cultivate emerging artists, while continuing to generate buzz around their established artists. Generating positive press and keen interest in artists helps prices stay higher. Galleries often offer deals to premier art museums looking to add to their collections, as being placed in the permanent collection of a major museum is a sign that an artist has achieved great success. Negotiating such deals also adds to the prestige of the referring gallery.

Dealers may offer discounts to famous collectors, because being included in “major collections” increases the artist’s value. Galleries also focus on developing relationships with serious collectors, who are obviously an important part of the art equation, while endeavoring to find new collectors looking to invest in hot new artists. For their businesses to grow, they need to continually find new artists and new buyers, as well as maintaining the current crop of artists and collectors.

Auction Houses and Other Alternatives

A shift to primary sales may seem like a more transparent option to the private sector, but it poses its own challenges. China offers a unique opportunity to study the effect of primary sales, because 50% of them are at auction. Prices are observable and set by the market, but the market is incredibly volatile; price fixing is still common.

While some are in favor of returning to the patron model, where artists are dependent upon the goodwill of wealthy supporters, it would likely hamper the success of many artists. Only artists with access to wealthy donors would be able to support themselves, so there would be fewer of them working. Galleries help to develop artists by acting as intermediaries between artists and collectors.

The most viable solution for adding transparency to the fine art market is publicly listing the sale price of a piece of work. While this wouldn’t be preferred by dealers and blue chip artists, it would go a long way to taking the mystery out of the market.

Related Articles

Evaluating the Current Art Market – Part 1 of 5 – In the first part we explored whether the current art market is in a bubble.

Evaluating the Current Art Market – Part 2 of 5 – In the second part we discussed the use of art as an investment.

About the Author:

Joe wrote about luxury asset trends for Borro Private Finance.