Auction Houses and their viability in the long term
To be able to sell premium artwork for millions of dollars, auction houses are giving up most of their seller’s commission and even a large proportion of their buyer’s commission. They are basically not making enough money to be sustainable in the long run. Why are they doing so? What game are they playing?
They are playing the game of networks and playing it very well. A relatively unheard of work of art – “Fine Classical Chinese Paintings & Calligraphy” – valued at between USD 320,000 and USD 450,000 was sold for USD 10,322,125. That is 23~32 times its value. And why is that so? It is because the sale of big works of art that make newspaper headlines attract many more sellers with less valuable work of art to these auction houses. Their network expands with word of mouth, with click bait articles, with the global news. And all of that without any advertising costs, if only they give up most of their commission in the sale of such big items. They are still making huge profits on those works of art, through the buyer. It just isn’t as much as it was before. And the upcoming 49 auctions in the next 30 days, with statistically each being worth at least more that USD 1,000,000, means that auction houses are here to stay.
From a networks standpoint, they use global mass media for free to advertise their brand and appeal for sellers, while buyers also pay higher amounts of money for items at auction if the potential to be written about in the newspapers and thus get free publicity is an option. The auction house could either choose to pay for advertisement and retain maximum profit during auctions, which would seem like a viable strategy. However, because of the amount of competing auction houses, the best strategy appears to be to financially tempt sellers by providing a lucrative deal for them, while increasing buyer fees. This strategy appears to have become a dominant strategy across auction houses as clearly sellers will prefer auction houses that get them the most profit. There is a Nash equilibrium where auction houses chase after artwork that is worth millions and make a lesser profit in order to make a higher profit on artwork of middle value, of which there is obviously a higher number available to sell. Selling 50 works of art for 10-20 times its value is more profitable than selling 1 work of art for 100 times it’s value, and auction houses play the game of networks very well to extract the maximum financial gain.
http://www.nytimes.com/2014/01/16/arts/design/christies-and-sothebys-woo-big-sellers-with-a-cut.html?_r=0
http://www.sothebys.com/en/auctions/2015/fine-classical-chinese-paintings-calligraphy-n09394.html