Christie’s agreed to give the seller of “Four Marilyns,” Turkish financier Kemal Cingillioglu, a $40 million house guarantee, which means the house promised to pay him up to $40 million no matter how the silkscreen fared. Since it sold for less [only $32 million], the house could now need to pay him the difference. Christie’s declined to discuss the terms of the deal.HT: Chris
Friday, November 20, 2015
Running an art auction
Art is a textbook example of the advantages of an auction over simple posted price: an auction awards the art to the highest value bidder, and sets a price. Competition between the auction houses has taken the form of price guarantees:
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This shows a couple problems with auctions vs simple price posting. First with art auctions, you never know when an art collector will show up and pay more than anyone would think for a particular painting. This is why an auction is an auction. If someone has more money and really wants something, they win it. If you put a price on the painting, you will only get that price. Auction houses have to assess art and figure out how much it will sell for. If they think an artist will sell for more, they will offer more of a price guarantee to have the artist’s work in their house. This causes the other issue. If the auction house guarantees a value, they have to sell the art for at least that value. The fact that the house guarantees a value sets up cartels. These cartels can eliminate funds that an auction house could make and forces the auction houses to figure out a way to eliminate them.
ReplyDeleteI have always wanted to attend an Auction, because I have heard so much about the great deals you get for less. I especially wanted to attend a Car Auction, however you have to have a licenses to attend. My best friend has purchased all of her cars at the auctions. She walked away without a monthly car note for 5 years. Not to mention, she got the same type of car as I had purchased from a dealer, but 2 years older, but at least 10,000.00 cheaper.
ReplyDeleteThe Various types of Auctions
1. Oral Auctions- also known as an English auction, bidders submit bids until only one bidder remains. The item is awarded to the last remaining bidder. This type of auction is often used to sell art, wine, antiques, and other goods.
2. Second Prize Auctions- also known as a Vickrey auction, is a sealed-bid auction in which the items awarded to the highest bidder, but the winner pays the second highest bid. This type of auction is used to sell rare stamps, and for auctioning off multiple units of the same item for example 20 computers.
3. First Price Auctions- also known as the Dutch auction- in a sealed-bid first-price auction, the highest bidder wins the item at a price equal to the highest bid.
4. Common –Value auctions-also known as the winner’s curse; is the value is the same for each bidder, but no one knows what it is. Each bidder has only an estimate of the unknown value. Since the highest and most optimistic estimate is likely to exceed the actual value, the winner will lose, on average.
This is a huge business, and it looks like the cartels are taking over.
I now understand how auction houses can lose when selling art. To guarantee business they overpromise what they can deliver to the dealers or private owners of art. The fees they charge may help but auction houses lose when art doesn’t bid up to the price they guaranteed. It’s interesting from the standpoint that they actually have become so competitive that making a profit on some deals doesn’t matter. As long as their competition doesn’t end up with the art. The Wall Street Journal article also shows how auction houses with actually go to the extent of offering art in return for the deal. This is not a good business practice as the losses can start to add up very quickly. For instance, Christie’s deal with a guaranteed sell price of $40 million, netted a loss of $8 million since it sold at $32 million. The owner had a sweet deal which is a switch to the saying “The house always wins.” When Christie Auction House doesn’t sell, then it not only losses money to the owner but there are losses in its commission fees as well. The Wall Street Journal article mentioned how this just didn’t happen once but actually repeated itself several times in one day.
ReplyDeleteReference:
http://www.wsj.com/articles/christies-sells-331-8-million-worth-of-art-1447212399
There are a variety of auctions available however oral auctions are the most familiar. In this case in the auction process, the price of the artwork is negotiated upward through the competitive bidding of interested buyers. The current market value of the artwork is what a buyer is willing to pay at the time of sale. However it seems, Christies spoke to soon offering the artwork owner a price guarantee. In this case the art work didnt sell for the promised $40 million, therefore Christies owes the seller the rest of the money to meet $40 million. Auctions are a great way to sell various types of things but setting a price guarantee isnt always the right route to take. The price something sells for depends on the worth of the piece to the sellers. In this case Christies assumed the artwork was worth more for what it sold for resulting in Christies owing the seller money out of their own pocket (or however they will get to the $40 milllion, the terms weren't discussed above).
ReplyDeleteAuctions identify the high-value bidder but they also set a price for the item. Proving Christies shouldn't have set the price for the item themselves, they should have let the bidders set the price and they wouldn't be in this predicament.
The old saying that the good/service is worth whatever people are willing to pay is usually true; but not in the case of Christie's and Sotheby's. While art is generally inelastic in that the demand curve will always be vertical because the quantity of art pieces will not change the price of any.
ReplyDeleteHowever when introducing price fixing and collusion - the customer is left in the dark in regards to market value. The customer must rely on the auction house to be fair but because art does not necessarily have references to value it's worth like, for example, the auto industry has the NADA - art brokers are able to operate withing the shadows of ambiguity as very little information is available to the customer - other than the visial artwork itself - the auction house can be very creative in manipulating the price.
In essence -because of a lack of standardized valuation methods for artwork, large institutions seem to be granted an inherited trust and respect - that they will do the right thing.
But, alas, like Wall Street, the urge to resist hiding numbers is too great - especially when the commission can be based off of artificial valuing.
I imagine many large auction houses still operate in this manner. Large for-profit firms do not commonly self-audit in a manner that would hurt their business.
Christie’s and Sotheby’s are well known, prestigious and have a high caliber reputation (at least once the collusion/cartel deal got sorted out in the 90s that is). The fact that Christie’s declined to comment on the terms of the deal that put them $8 million in the hole due to a price guarantee to a seller (Crow, 2015), indicates how badly they wanted the “Four Marilyn's” in their auction and not their competitor’s. Is it just because the demand for the product was already high, making it more desirable? “As with any industry, when demand is high, the major players will go to much greater lengths and in some cases much further out on a limb to deliver particularly hard-to-obtain consignments.” (Forbes, 2016).
ReplyDeletePre-sale guarantees such as this seem to be common. Gleadell (2015) ponders a very good question though: can these types of guarantees be considered a form of price manipulation? Is it a loophole? Lets say a seller owns a gallery representing X artist. A good showing at an auction would boost their street cred: they would be able to increase the artist prices at the gallery after a high sale in auction by that artist. Not to mention the publicity hook! The seller has a “vested interest” in making sure that artist sells, and sells well – so in their mind, they don’t care who pays them the $40mm as long as it’s paid.
Being in the art field for the past 20+ years and working for non-profits with annual auctions, getting a good auctioneer with a good reputation is essential. Buyers want to know that it’s an honest, good ‘competition,’ without anything hinky going on behind the scenes. Often, galleries (sellers) will “donate” a work of art to a nonprofit for their auction, and set a “reserve price”: it is not allowed sell for less than that amount which is based on what that artist sells for at their gallery already. This way the work is not devalued and it is incentive for prior buyers to keep investing in that gallery/artist as they see an increased value. Yet if the piece in auction doesn’t meet a reserve price, the house keeps it (the nonprofit in this case).
It seems to be a common practice for small nonprofits (possibly large ones as well? Unsure). Potential buyers are made aware of the reserve prices up front (on the labels and in the auction catalogue), so if a buyer is actively following the bidding in process, they can tell the house (the nonprofit) “won” the artwork. The loser in this scenario however, is the nonprofit hosting the auction as the fundraiser, can end up with unsold works. Less money for them, plus, they now have to worry about storage for the unsold pieces, the cost of art insurance, will any harm come to it while its being unframed or while it’s in storage (is it even small enough to be stored!); also, worry whether it’ll sell a few years down the line (because repeat attendees don’t want to see the same work two years in a row), can the nonprofit save face with the artist who’s work it is or the gallery… the list of nonprofit concerns in an auction is pretty long. It is a tricky relationship that takes a lot of good, clear communication.
REFERENCES:
Crow, Kelly (2015, November 10). Christie’s sells $331.8 Million worth of Art. Wall Street Journal. Retrieved from https://www.wsj.com/articles/christies-sells-331-8-million-worth-of-art-1447212399
Forbes, Alexander (2016, August 8). How Much have Guarantees Aided Christie’s Dominance at the Top End of the Auction Market. Artsy. Retrieved from https://www.artsy.net/article/artsy-editorial-how-much-have-guarantees-aided-christie-s-dominance-at-the-top-end-of-the-auction-market
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics: A problem solving approach. Chapter 16. Boston, MA: Cengage Learning.
Gleadell, R (2015, May 19). Art Sales: at what price guarantee? Telegraph. Retrieved from http://www.telegraph.co.uk/luxury/art/71655/art-sales-at-what-price-guarantees.html