The art market is the marketplace of buyers and sellers trading commodities, services, and works of art.
The art market follows an economic model that considers more than supply and demand; it is a market where art is bought and sold for values based not only on a work's perceived cultural value, but on its past monetary value as well as its predicted future value. The market has been described as one where producers do not create work primarily for sale. Buyers often have no clear understanding of the value of what they buy, and middlemen routinely receive compensation for sales of items they have never seen, to buyers they have never interacted with.Plattner, Stuart, A Most Ingenious Paradox: The Market for Contemporary Fine Art, American Anthropologist 100(2):482-493, 1998. Moreover, the market is not transparent; private sales data are not systematically available, and private sales represent about half of market transactions. In 2018, Robert Norton, CEO and co-founder of Verisart, noted that "Art is the second-largest unregulated market after illicit drugs and it's significantly overshadowed by fraudulent activity."
Economics Unlike the volumes in some international markets in the financial field where millions of people and firms participate in buying and selling financial interests, or economic and consumer goods markets where products are usually exchanged using more standardized contracts, art market activity largely follows the demands of a more limited array of private collectors, museums, and large corporate interests as the principal market participants. The art market sees itself as a microcosm: it lists its collectors in the hundreds, as opposed to the securities market which has millions of participants.ARTnews: The Top Ten , The ARTnews 200 Top Collectors . One art writer answered the question: "Do you see the art world as a microcosm of other broader, power communities?" with the following observation: "I'm not sure if it's a microcosm or the shape of things to come. Its manic internationalism."Insider Art V Magazine, 2008-11-12, vmagazine.com. Accessed 20 June 2012. Corporate collectors, however, can have a disparately large market impact, for instance, Spear's reported in 2015 that British Rail began investing in art for its pension fund beginning in 1974 (prior to privatization), spending about £40M or approximately 3% of its funds on art, before selling those assets between 1987–1999.Lindsay, Ivan, Go Figure, Spear's, spearswms.com, 21 January 2011; free archived version. Accessed 17 November 2015. British Rail Pension realized an annualized return of 11.3% due to several market-specific factors particular at the time. British Rail's efforts realized profits, particularly due to the Impressionist portfolio, but the collection was liquidated because it came to be seen as an illegitimate investment area, particularly as alternative investments became available. Additionally, because original artworks are not fungible, they have valuation challenges not similarly affecting securities,Baumol, William J., Unnatural Value: Or Art Investment as Floating Crap Game , The American Economic Review, 76:2 (May 1986), pp. 10-14, Papers and Proceedings of the Ninety-Eighth Annual Meeting of the American Economic Association; Journal of Arts Management and Law (now The Journal of Arts Management, Law, and Society), 15:3, 1985, pp. 47-60. . with dynamics of what Karpik calls singularities.
Thus, because the art market's participants are far more limited in number than the securities or commodities markets, because artworks are not fungible, and because art valuation relies to a great extent on the advice and enthusiasm of a variety of specialized market analysts, these limitations each in turn dictate the size of the market and increase the risk that some items may be over or undervalued.
The art market moves in cycles with activity generally peaking in the spring and autumn when the major auction houses traditionally schedule auctions, and results in the market being seasonal rather than ongoing.Art Market Cycles, artmarket.com, retrieved 20 November 2011. While private sales take place all year, those sales are often not publicized as auctions are and thus do not affect the market until they become known.
Art valuations made for an autumn auction may be unrealistic for the following spring auction season because fortunes in the financial markets during one season can affect the art market in the following season, and equity markets do significantly impact the art market. Volatility in the financial markets often causes volatility in the art market as happened in the contraction of the art market during the Great Recession when sales at Sotheby's, Christie's, and Phillips de Pury & Company were less than half the previous year: November 2008, $803.3 million compared to November 2007, $1.75 billion; and between 2000 and 2003 when the annual volume of art works sold at auction dropped 36%.Esterow, How to Buy in 2009 , ARTnews, March 2009. In other instances, the art market can fare reasonably well despite volatility in the stock market such as happened from January 1997 through May 2004 when the average quarterly fluctuation in the Artprice Global Index was two to three times smaller than the same statistic for the Dow Jones Industrial Average and the S&P 500.
As art market participants' fortunes wax and wane in the financial markets, buying power evolves and affects participants' ability to afford highly valued works, resulting in new buyers and sellers entering, leaving, or re-entering the market, and an artwork sold to offset losses in the financial market might be sold for substantially more or substantially less than its last hammer price at auction.Gerber, Manuel, Primary Art Market Investments - A Safe Haven when All Else Suddenly Correlates? , Prime Art Management Ltd., published in Art Fund Tracker, Nov. 2008. In the late 1980s during the stock-market boom, the art market expanded in turn with prices soaring to new heights, and investment firms took a greater interest in the art market and began to study it in-depth.Campbell, The Art of Portfolio Diversification, Maastricht University, March 2004. (art as an asset class)Goetzmann, William N., Accounting for Taste: Art and the Financial Markets Over Three Centuries, The American Economic Review, 83(5), Dec. 1993, pp. 1370-1376. Concurrently, the previously non-transparent art market became more accessible via the increasing availability of indices and online data,Campbell, R.A.J., Art as a Financial Investment, Erasmus Univ., Rotterdam, Maastricht Univ., 2007. although researchers discovered biased price estimates in the auction houses.Mei, J. and Moses, M., Vested Interest and Biased Price Estimates: Evidence from an Auction Market, The Journal of Finance, 60(5), 2005, pp. 2409-2435.
Art sometimes has transient fashionability that also can affect its value: what sells well for a time may be supplanted in the market by new styles and ideas in short order. For instance, in the spring of 2008 a collector offered over $80 million for Jeff Koons' stainless-steel Rabbit, and yet a year later, of four works in the fall auctions at Christie's and Sotheby's in New York, only two of his pieces sold well and one failed to sell entirely.Inflatable investments, The volatile art of Jeff Koons, The Economist, 28 November 2009. In 2011, Christie's sold Koons' Balloon Flower sculpture for $16.9 million.Christie's, Auction result, Sale 2355 / Lot 23, christies.com, retrieved 21 November 2011.
Primary and secondary markets The art market as a whole is affected by its two main parts: the primary art market, where new art comes to the market for the first time, and the secondary market, for existing art that has been sold at least once before. Once a work is sold on the primary market it enters the secondary market, and the prices for which it sold in the primary market have a direct bearing on the work's value in the secondary market. Supply and demand affect the secondary market more than the primary market because works new to the market, mainly contemporary art, have no market history for predictive analysis and thus valuation of such work is more difficult, and more speculative.Gerard and Louis, On pricing the priceless: Comments on the economics of the visual art market, European Economic Review, Elsevier, vol. 39(3-4), April 1995, pp. 509-518. (membership required). Gallery, dealer, consultant, and agent promotion as well as collectors acting as alpha consumers (trend-setters) are the forces at work in valuing primary market works.
Market entry barriers As with blue-chip stocks, works by "blue-chip" or well-known artists are generally valued more highly than works by unknown artists since it is hard to predict how an unknown artist's work will sell, or whether it will sell at all. High barriers to entry for artistsJeffri, Joan, Philanthropy and the American artist: A historical overview, The European Journal of Cultural Policy, 3(2), 2009, pp. 207-233.Jackson, M.R., et al, Investing in Creativity: A study of the support structure for US artists , The Journal of Arts Management, Law, and Society, 2004. PDF from Urban Institute, urban.org. create scarcity in the supply and demand of the market, in turn driving up prices and raising questions of efficiency in the art market transactions.Bonus, H., Ronte, D., Credibility and economic value in the visual arts, Journal of Cultural Economics 21, 1997 103–118.Adler, M., Stardom and Talent, in Handbook of the Economics of Art and Culture, Vol. 1, Chap. 25, 2006, pp. 895-906. While a high market entry barrier may result in having a smaller pool of artwork producers in the auction-level portion of the market, and in greater market predictability by virtue of that smaller pool and thus more reliable valuation measures, its axiomatic effect is of lesser artistic diversity negatively impacting the size of the buyer pool.Schönfeld and Reinstaller, The effects of gallery and artist reputation on prices in the primary market for art, Working Paper, Department of Economics, Vienna University of Economics & B.A., May 2005. For this reason, gallerists and art dealers consider what types of works are currently in vogue before deciding to represent a new artist and are highly selective in those choices in order to maintain a level of quality that is saleable. All these concerns are in play when gallerists set prices for emerging artists at a much lower level than for established artists.
This selectivity may also be practiced on the buy side, in terms of gallerists being selective about which buyers to sell to. As another form of gatekeeping, this is done primarily to protect price points from the potential dangers of speculation, or what Velthuis calls "control of the biography" of the artwork.
Market transparency