PHENOMENOLOGY AND ECONOMICS OF ART MARKETS: AN ART HISTORICAIJ PERSPECTIVE Leslie P. Singer The following propositions will be elaborated in the pres...
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The following propositions will be elaborated in the present paper:

One. Revolutionary changes in easel painting from the second half

of the nineteenth century to the present facilitated entry. Moreover, factor-augmenting technologies radically lowered the supply price of paintings. Two. In response to the foregoing, mutual interest developed be-

~'een buyers and sellers of"establishment" art with a view to restraining entry of substitute products. This unusual collusion between buyers and sellers in restraint of trade can be rationalized by the buyers' utility functions which contain the Cr ante supply curve as an argument. Steady state demand curves deduced from such utility functions are considerably less elastic everywhere than demand curves derived from conventional preference systems. Consequently, equilibrium output is smaller than would be the case otherwise. Three. The inability of oligopolistic dealers to prevent entry by a large

number of small firms induced disequilibria in the secondary art market. Consequently new modalities for "patenting" artists were developed. Four. Collector-tycoons such as the Saatchis of London entered as

self-insured buyers. They do not rely on established dealers to restrain ex ante supply. This state of affairs skews the market for art and extends the price gap between the top and the remainder of the


market. We conclude that unlike in other markets unrestrained competition may be a sub-optimal structure for art.

Changing Methods of Production The demand for culture, and especially for art, is a subset of the demand for hedonic characteristics as opposed to utilitarian characteristics. The consumer is assumed to have near-perfect knowledge of utilitarian characteristics but imperfect knowledge of hedonic characteristics. Where imperfect knowledge exists, proxies have to be purchased which provide the necessary information -- usually incomplete -- on the probability that a given level of hedonic satisfaction will be realized from the purchase of a commodity or service. The process whereby objective characteristics are converted into hedonic characteristics is complex. Moreover, the process has historically undergone numerous changes (Singer, 1978; Owen, 1979; McCain, 1979). In the Renaissance and the Baroque periods, a clear relationship existed between hours of an artist's labor of given quality and the price of a work of art. The relationship was similar to that between the work of professionals such as surgeons or lawyers and the price of the service. High calibre artists with great manual dexterity and superior aesthetic insight were sought out by Renaissance princes and Baroque monarchs, as wealthy industrialists currently seek out the freest surgeons. The demand for works of art was contingent upon the availability of edifices to house such art. With technological advances in construction and engineering, palaces and cathedrals were raised. Their vast walls created demand for decorative objects, including easel paintings and murals. As demand rose, technological and organizational advances were made in the production of art. Carefully managed workshops instituted division of labor, which assigned specialists for mixing and preparation of pigments, assistants for cleaning and trimming of brushes, etc. Artists were trained to perform different tasks, such as painting draperies and painting background decorations. There were specialists for "Putti" and stiU-life backgrounds. The Renaissance workshop was a highly sophisticated enterprise. Sometimes the workshops resembled a great kitchen in a modern hotel with the pastry cook, the vegetable cook, and the side dish cook all under the control and supervision of the great chef -- the master -- who put his indelible imprint on the repast. During most of the Renaissance and the Baroque periods prices of both t'me and decorative arts were set in markets exhibiting only


minor imperfections. The painters' guilds were only mildly restrictive. The random distribution of objectively demonstrable talent insured the inelasticity of supply of great talent some of whom earned economic rents. However, a complex apprentice system, open entry to the studios of masters and rising prices for art and decorative objects insured that the supply of artists and craftsmen did not become completely inelastic. Changes in public and private taste caused some workshops to lose market shares while others gained market shares. Production functions and induced supply curves for art did not significantly differ from the supply curves for fine furniture. For example, murals which required more hours of work, were priced higher than easel paintings (Vasari, 1970). The industrial revolution and emergence of a large commercial middle class, along with an unprecedented expansion of living space, brought about a quantum jump in the demand for decorations and art. Art was no longer deemed appropriate only for cathedrals and princely mansions. Art was also demanded by ordinary burghers whose houses became increasingly more spacious. Initially, supply responded to the rise in demand by a proliferation of workshops in Holland, England, France and Italy, which produced large quantities of repetitive and uninspired work for undiscriminating clients (Montias, 1981). While there were exceptions, such as the case of the Medici monopsonists (Hibbert, 1975) supply price reflected hours of work as measured by the fineness of descriptive detail and polish of surface. Innovation was of secondary importance. There were trends and fashions in art just as there were trends in costumes and in other personal attire. There were no, or certainly very few, art movements where innovation was a major concern. By the second half of the nineteenth century, it was clear that the supply of works of superior craftsmanship was becoming increasingly scarce. Demand was rapidly increasing. Prices for the best academic work were rising. Contemporaries of the Impressionists, such as Bouguereau continued to produce finished work in the tradition of nineteenth century masters. The Impressionists revolutionized the production function by making finishing and careful under-painting unnecessary. In terms of nineteenth century standards, the fmal product of the Impressionist painters, with their dabs of unmodulated pigment on unprimed canvases, appeared to be unfmished if not fraudulent (Riviere, 1877). It


is not surprising that the art establishment was unable to accept Impressionist works as objects of art fit for the market place (Leroy, 1984). There were other technological advances such as the tubing of oil paints, which enabled artists to complete landscapes and other exterior scenes out doors instead of in the studio (Hebert, 1879). The main advance, however, was the drastic factor-augmenting reduction in the labor input needed to produce a square inch of marketable output. The canvases became brighter and more colorful which made Impressionist painting universally appearing(I). The sudden rise in the availability of wall space in ordinary houses caused demand for decorations (not necessarily for high art) to rise. Once the revolution in art appreciation had been completed, the Impressionists and their many followers caused the supply function to become very elastic. Within a few decades, framed canvases covered with pigment were available in abundance in street markets and in town squares. The subject matter, too, was unassuming: examples were vases of flowers, outings and ordinary people eating and drinking. Such works could now be produced with the input of minimally skilled labor and were sold at prices the average undiscriminating burgher could well afford.

Restructuring of Art Markets: Limited Editions Fortunately for art history, several perceptive dealers, (Vollard, Durand-Ruel, etc.), realized that a secondary market for contemporary art had to be organized and that such a market could not function with unlimited free entry. Several changes in the organization of art markets had to take place in order to attain market prices above the opportunity cost of intelligent and skilled artists who were capable of producing art that would stand the test of history. First, the supply both art and of artists in the market had to be constrained. Second, information on the potential art historical significance or other quality dimensions of contemporary works of art had to be made scarce and therefore expensive. Third, buyers of serious art had to be offered insurance that would protect the future value of their assets. Innovation in art had to be protected against infringement by imitators. One had to rely on voluntary compliance by sellers and buyers (along with museum curators and art critics who certified some artists as innovators, legitimate or otherwise.) In the Renaissance one could rely for protection against infringement on the natural scarcity of talent as demonstrated by superior craftsmanship. Clearly, this was no longer possible when almost anyone could produce perfect substitutes of minimalist, conceptual or other work. The preceding economic principles


are best illustrated with reference to "Limited Editions". Limited Editions became popular at the turn of the nineteenth century. Prior to the formalization of Limited Editions, Renaissance and Baroque artists pulled copies of their blocks and copper plates until the blocks or plates were worn. After the artist's death, wood blocks and copper plates were saved and retouched. Thousands of copies were pulled by admiring followers (Panofsky, 1954). The nineteenth or early twentieth century Limited Edition was usually produced by a dealer. The dealer selected the artist and controlled the size of the edition and often intervened in the market to maintain the value of the product (much like central banks occasionally intervene in financial markets if exchange rates are seriously out-ofline). Until established artists such as Picasso, Braque and Dalibecame entrepreneurs on their own account (Mourlot, 1970) the dealer's selection of an artist extended to the prospective buyers the necessary information on quality. The dealer's guarantees of supply constraints furnished insurance against unexpected capital losses; in addition, dealers were often willing to buy back products or accept trade-ins. The following models rationalize collector-dealer behavior. Consider a multiplicative utility function, 1, indicated in chart 1 below, s(qi) is the ex a n t e supply function; q, is quantity of art. There are usually indivisibilities in limited editions, such as 50, 75, 100, etc. The marginal rate of substitution, MRS, that is, the ratio of the partial derivatives with respect to a random pair of goods ql, q2 where q2 stand for art; is equation, 2, in chart 1. In other words, MRS is weighted by the information obtained from the ex a n t e supply function which specifies the projected edition and possibly also the dealer's insurance or safeguards with respect to the size of the edition. In the special case of "limited editions" zero elastic ex ante supply curves cause the second term in M.R.S. to vanish. The preference systems are as shown in Fig. 1; namely, two convex preference systems, Ui and Uj corresponding to two anticipated editions, i,j. For each expected edition we generate a non-intersecting preference map. The slope of Uj is everywhere greater than the slope (MRS) of Ui. For each price pr, we shall have, Pr = MRS (Ui) and pr = MRS(Uj) namely, two distinct points of buyer equilibrium or shares o f e x a n t e editions as shown in Fig. i or, equivalently the same share of the edition, qa, will be purchased on Uj at a higher price than on Ui. At A in Fig. I equilibrium on Uj appears to yield less utility than the higher corresponding Uj. This is because on Uj the buyer expects the


Fig. 1

Fig. la


1. U ~i,s(qi)~ = ~i Eqiais(q;)~


alq 2Is{q1)+ q! In q l I'(ql)~ a2 ql Is(q2 )'~q2 In q2 t'(q2~


qo I ,




smaUef edition which yields more hedonic utility, compensating for the higher price. We derive market demand by adding the shares of each edition which buyers are willing to purchase. Equilibrium is at pa, if the expected edition is qa, and at lYo,if the expected edition is qb, and so on, as indicated in Fig. la. The preference system Ui defines the market demand curve D1 and Uj def'mes D2. For a given planned edition, the seller may engage in third-degree price discrimination along a given demand curve charging collectors, museums, and other dealers prices in inverse proportion to elasticity, until the edition is exhausted. Beyond qa, the demand curve D2 is undefined. When the dealer wishes to optimize the size of the edition, after having paid the artist a lump sum for the plate, the relevant demand curve is D*. This is derived as follows: let qa, qb, etc. be options for the editions. If qa is expected, short run demand is D2, for option qb short run demand is D1, etc., in inverse order. The steady state demand curve; namely, the loci of equilibria, is the curve AB with equilibrium prices, pa, pb, as indicated by the solid lines in Fig. lb. One deduces a steady state demand curve which is considerably less elastic than the corresponding short-run demand curves. The reduction in elasticity depends on the weights given to ex ante supply s(q), which shift the intercepts. The larger the jumps, the more will elasticity decline, other things being equal. The demand curve D* bears some, albeit superficial, resemblance to numerous attempts by other writers to reshape the theory of demand. Probably closest is Philip H. Wicksteed's version of a steady state demand curve incorporating "stock" supply relations (Wicksteed, 1912, Friedman, 1953, Yeager, 1960). The conclusion that can be drawn from the present analysis is that i f e x a n t e supply enters the consumer's utility function, editions will be smaller and new artists accepted and promoted by galleries will be fewer than would be the case if a conventional independent supply and demand model were to prevail.

Generalizing from Limited Editions to Broader Markets for Works of Art Nature controls the scarcity of flawless emeralds or diamonds, but a minimalist artist such as Donald Judd is the only person who can control the output of Donald Judd. Artists cannot always be relied upon to limit their product; consequently, dealers control the supply of a


school's output by limiting the number of artists who are selected and by designating so-called good periods in the artist's oevre.The artist has no legal protection for his invention. There is no office that can bestow patent rights to an artist for work that at least superficially can be duplicatedby almost anyone. Large quantities of substitutes can be brought to the market at any time. To resolve this problem, collectors and dealers collude in order to extend to artists who have created new work the equivalent of "patents" for life. Namely, the authenticated works done during a specific period in the artist's life become ascribed to the artist. Thus the images created by the artist become proprietary "icons", such as Andy Warhol's "Jackie" or "Campbell Soup". Subsequently, the art establishment does not accept any other work by any other imitator; nor does it accept any work done by the artist in imitation of the "icons" of a previous phase in the artist's development. Each phase in the artist's creative process must seek its own "icons" as was the case with the various phases of Picassos' artistic progression. As distinct from standard monopolistic exploitation, where sellers constrain supply at the expense of buyers, collectors rely on dealers to restrain the supply of substitutes. Moreover, collectors are willing to concede rents if dealers can be relied upon to restrain entry. Unlike other restricted markets where barriers to entry benefit sellers at the expense of buyers; in art markets buyers and sellers are equally interested in restraining trade. The principal dealers and major collectors also had a limiting influence on recycled art by controlling the "Catalogue Raisonne" of artists whom the dealers had selected for the trade. The catalogues tend to eliminate various undocumented sales by artists on the sly. (One notes that over 95% of entries in some catalogues of established artists list dealers as primary owners of the artists' works.) In many instances overpricing of a living artist's works by both dealers and collectors act as an inducement (or bribe) for artists to abandon their most popular styles, which collectors expect to be of arthistorical significance. An example is Julian Schnabel's recent departure from his broken crockery works. These pieces could have been reproduced ad infinitum; however, such repetition would have ultimately destroyed Schnabel's art-historical significance with attendant capital losses for current holders of his works. (Art and Auction, 1987, p. 144).


Prominent artists are conscious of their place in art history and will maximize discounted total utility by varying their styles so as to preserve the integrity of the corpus of works, some of which will remain and appreciate in the artists' personal inventory, (Singer, 1981). Gains forgone by the artist are partially offset by quasi-rents, due to the fact that new styles by the same artist tend to be overpriced relative to the early seminal works on account of continued excess demand for the artist's production by indiscriminate collectors. Prices of late works will, however, recede to their art-historically justifiable levels when the pieces are recycled.

Breakdown of Dealer Oligopolies The utility of holding art is adversely affected by the variance of the price in successive auctions even if the holder does not participate in trades. Unstable prices cause buyers to question their assessment of the art-historical significance of the works. Owing to the fact that a very close association exists between price and quality of a work of art, any downward revision of previously realized prices will connote to the holder a downward revision of art-historical significance. Price is also a gauge of quality in curatorial perception because curators' utility functions include the probability of public approval of their purchases. Thus, both museums as well as corporate collections under-represent contemporary artistic activity. Revision may be made as the art-historical significance of works is better understood and when prices are no longer distorted by imperfections of the contemporary art market. However, such revisions are costly to both taxpayers and donors. Unlike downward revisions in stocks, which induce purchases by speculators who expect a reversal, downward revisions in the prices of an artist's works are generally perceived by collectors as more or less permanent. The historical evidence, well known to collectors, suggests that while reevaluations of art movements do occur, such as recent reappraisals of works by Millet and Bouguereau, these cycles are of very long duration (Art and Auction, 1987). Art consumption is a social event, consequently, when an artist or a school is rumored to be in disfavor and prices fall, established collectors immediately disassociate themselves from such artists because continued holding would connote "poor judgement in art." Herd-like selling subsequently induces cumulative price reductions. Fear of "losing face" causes established collectors to buy in a very narrow market where negative price variations are uncommon. The supp-


ly of premium art (first generation American Abstract Expressionists, first generation Pop, etc.) is very inelastic. This excess demand causes spectacular price increases. Simultaneously, excess supply in associated schools or second and third generation artists causes prices in these markets to lag disproportionately behind the prices realized by art superstars. This can be explained in terms of the model introduced above. The elasticity of the steady state demand curve is high or low according to whether the impact of anticipated supply constraints on the utility function is minor or major. That is an inverse relationship exists between elasticity and the influence on the consumer of anticipated supply constraints. We may assume profit maximizing behavior by dealers. Without loss of generality we may set marginal production costs at zero, thus art will be priced higher and output will be lower for relatively inelastic demand curves. It is reasonable to assume that anticipated supply constraints will have a great impact on the demand for a gallery's top ranked artists, whereas supply considerations may be of very little concern for the average artist. A good example of the price gap phenomenon is where dealers offer a small number of signed graphics by an established artist at very high prices and simultaneously a large unsigned (or signed in plate) edition at moderate prices. Such extreme price discrimination can only be rationalized by assuming utility function which includes anticipated supply as argument. An unsigned Matisse, Chagal or Miro are in no manner aesthetically different from the signed product. The plates do not wear out as was the case with the classical copper plates of Rembrandt. However, this strategy of separating the markets, which worked so well in the past, was beginning to break down in the late 1970's.

Entry of Self Insured Collectors In the last quarter of the current century, the cyclical behavior of art markets and attending uncertainty caused many of the principal dealers of the 60's such as Leo Castelli, Sidney Janis, Denise Rene and others to lose market shares. Public attention was directed towards the major international auction houses where the bulk of narrow establishment art was traded to risk-averse collectors and curators (this occurred in spite of current revivalist efforts by Castelfi) in the past, the ability of a small number of well informed dealers to offer insurance against "default" has acted as a barrier to entry by other dealers who


did not possess the rare art-historical insight and taste that long run projections required. Dealers might have contributed to their own demise by action similar to what occurs in the market for new technologies (Shleifer, 1986). New and original art work surfaces sporadically as a random process, similar to the development of new technologies. However, dealers decide to innovate only when expected profits are at a maximum. This influx of innovations creates peaks in the art market due to the fact that simultaneous innovations by many firms raises aggregate demand as collectors place their bets on the new crop of artists. Simultaneous innovation by many dealers who launch new substitutes also raises aggregate demand for less innovative associated artists. In the late 1970's, high profits earned by some key dealers and collectors on their inventories, as well as profits earned by auction houses, attracted a large number of entrants (dealers), just as economic theory would predict. The constant flow of inventions and unrestrained innovation by dealers made it difficult even for the key players to remain infallible in offering insurance that an artist selected by them would continue to be accorded art-historical significance.(2) In the restricted oliogopolistic dealer markets of the preceding periods, artists tended to be isolated from short-run business considerations. The art that was produced conformed to the artist's own vision of the world. The umbrella provided by established dealers sometimes retarded innovation but usually the primary talents attained recognition. It seems that purely competitive markets with unbridled entry may not always yield the correct art-historical results. The emerging countervailing forces were collector-tycoons, the Saatchis of England and others, who entered the market as self-insured buyers (Stratton, 1985). They purchased large quantities of diverse art and relied on the law of large numbers for winning bets. Collectortycoons are likely to play the same role in today's uncoordinated markets for contemporary art as was previously carried out by the principal dealers. Namely, collector-tycoons tend to sequester chosen artists and protect their work against infringement by imitators. In restricted markets many contemporary artists earn rents, thus they, too, become willing participants in the process of restraining supply (3). Moreover, owing to the fact that the number of collector-tycoons is likely to remain limited, selection by them if only by serendipity becomes a substitute mode of "patenting" artists in fluid dealer markets.


Conclusion The foregoing analysis suggests that competitive dealer markets with unbridled free entry are not necessarily optimal market structures for art, if art-historical continuity and national pride are relevant characteristics in utility functions. On the other hand, markets dominated by a few collector-tycoons may be significantly skewed. The surviving art and art movements may be idiosyncratic and subject to frequent and unpredictable revisions by the art establishment. Furthermore, deaccessioning of art may inflict large capital losses on public collections. In the main, curators are compelled to enter art markets when the upward revised art is already very expensive. The entry of curators will, in and of itself, raise prices. Less idiosyncratic buying might have resulted in more representative acquisitions. Traditional oligopolistic dealer markets (where the secondary market protects the primary art market against infringement by substitute products) appear to have been more conducive to art-historical continuity. They also tended to produce a more representative menu of contemporary art for public viewing (and buying). It is unlikely that the old market structures can be revived. However, one might induce a broader selection of contemporary works in public collections by government support for exhibitions and acquisitions, with the stipulation that the works submitted be different from the art that is on the current acquisitions lists of collector-tycoons. One would have to move cautiously with this proposal because of a concern that one might unwittingly establish a state-supported permanent "Salon des Refuses".

Indiana University Northwest

Footnotes 1. We should note that the laborious techniques introduced by Seurat and the Divisionists was an aberration which was quickly abandoned by mainstream artists. 2. I have calculated the odds on probability that an artist who was shown in one of the listed galleries in New York or Chicago, would


attain art-historical recognition within 15 years. The odds on probabilities were 1 in 16.78 in 1950 - 1965. The odds dropped to 1 in 111.3 in 1970 - 1985. Empirical information is in "Probability of Success in Artistic Careers in the US: 1955 to 1970 vs. 1971 to 1985; a Multiple Logit Analysis. (Paper read at Midwestern Economic Association meetings. Available on request.) 3. For thorough analysis of the sociological ramifications of collectordealer relationships see Raymonde Moulin. The French Art Market, A Sociological View. New Brunswick: Rutgers University Press, 1987. (Translated from the french by Arthur Goldham-


References Art and Auction, Vol. 9 (January, 1987) pp. 137-183. Warhol p. 143, Johns p. 142, 143. Schnabel p. 144. Millett p. 138.

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