For two decades some New York State lawmakers have been trying to curb the practice known as “chandelier bidding,” a bit of art-market theater in which auctioneers begin a sale by pretending to spot bids in the room. In reality the auctioneers are often pointing at nothing more than the light fixtures.
Third Party Guarantees
A guarantee typically operates as it sounds. When someone offers a piece for auction, the house will sometimes guarantee that the seller will make at least a minimum amount by arranging with a third party to purchase the work for a specific price, undisclosed to the public, should it fail to sell for more. In exchange for putting up the funds, the guarantor, whose name is also not revealed, gets a cut of any proceeds above the guarantee.
So if a third party commits to a $10 million guarantee, and the bidding reaches $12 million, the third party receives a piece (often 30 percent to 50 percent) of the additional $2 million.
Much like reserve prices, these practices serve to take away some of the risk for the seller. After all, the auction house is hired by the seller to generate as high a winning price as possible. It is important to distinguish whether the goal is to protect consumers from deliberate misinformation, which could make all auctions more efficient, or from high prices, directly at odds of the whole enterprise.