The high-end art industry is one of the few businesses in the world where the buyers tend to pride themselves on how much they spent on the product. The more expensive a painting is, the more prestige it brings to the buyer.
However, it is also one of the most manipulated markets in the world, with little to no supervision over any of its practices. And everyone from the galleries to auction houses takes full advantage of the unregulated nature of the market to manipulate the price of the paintings.
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How art prices are manipulated
When galleries auction off paintings, they try to ensure that the artworks are not sold to clients who might flip them soon in the secondary market as this can bring down the prestige attached to the work. If an artwork that recently sold is being publicly auctioned off again, galleries are likely to have their own people attend the event. If the bids on the painting are seen as too low, the gallery will start bidding on the painting, raising its price to what it feels is appropriate. This allows the gallery to prevent the artwork from being sold off at a lower price.
Another way high-end art prices get manipulated is through loans offered by auction houses to prospective bidders. An excellent example of such a scenario was the 1987 auction of Vincent van Gogh’s painting Irises by Sotheby’s. The auction house had extended credit to one of their bidders from Australia. As a consequence, the person won the auction by placing a record bid of US$53.9 million, out of which US$27 million was covered by Sotheby’s. If the auction house had not extended the credit, then the painting would have been auctioned off for a lesser amount. Offering a loan allowed Sotheby’s to manipulate the price of the artwork to the level they wanted.
High-end art prices are also manipulated through guarantees. When a particular painting is being auctioned, a guarantor will offer to buy the artwork at a minimum price as agreed between the seller and the auction house. So, if a guarantor agrees to buy a painting at a minimum price of US$7 million, then the painting is guaranteed to never be sold off for anything less than the amount. Since such deals are made in secret, the public views the high selling price as a sign that the painting is very valuable when in reality the price was simply manipulated.
Future of high-end art
Over the past years, the high-end art market had seen a decline that plagued the industry with low auction prices and revenues. However, the niche has been seeing modest growth over the past several quarters, thanks to the increasing popularity of Internet auctions.
“Online sales have soared, with new bidders gravitating to the e-commerce model. Social media exposure has grown, and the company [Sotheby’s] is getting more of its revenue from sales of middle-market items. What that says is that a growing audience of high net-worth individuals is getting interested in art and collectables, and even if they’re not necessary as wealthy as the ultra-high-net-worth families that have traditionally participated in the art market, they’re helping to drive demand,” says an article at Fool.com.
And with Asian markets like Hong Kong also contributing a higher proportion of millionaires who participate in art auctions, experts predict good times ahead for the high-end art niche.