Erasmus Universiteit Rotterdam
Erasmus School of History, Culture and Communication
The Changing Global
Auction Market
Influence of the Economic Crisis on
the Secondary Art Market
Jorien Freya Zuidgeest
289539
Master Thesis
July 2011
Table of Contents
Page
1. Introduction
1.1 In General
1.2 Hypotheses
1.3 Structure
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2. The Secondary Art Market
2.1 Introduction
2.2 Historical Overview
2.2.1 The 1950’s – 1960’s
2.2.2 The Booming 1980’s and the Period After
2.2.3 The Latest Art Market Boom
2.3 The Art Market
2.3.1 Characteristics of the Art Market
2.3.1.1 Transaction Costs
2.3.1.2 Information Costs
2.3.1.3 Uniqueness
2.3.1.4 Irregularity of trade
2.3.2 Separation of the Art Market
2.3.2.1 Primary Art Market
2.3.2.2 Secondary Art Market
2.3.2.3 Tertiary Art Market
2.4 The Financial Market
2.4.1 Goods
2.4.2 Demand
2.4.2.1 Demand and Goods
2.4.2.2 Demand in Secondary Art Market
2.4.3 Supply
2.4.3.1 Supply and Goods
2.4.3.2 Supply in Secondary Art Market
2.4.4 Price
2.4.4.1 Price Elasticity
2.4.4.2 Price in Secondary Art Market
2.4.4.3 Price Determinants
2.5 Conclusion
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3. The Motives For Buying Art
3.1 Introduction
3.2 Motives of Contemporary Art Buyers
3.2.1 Uniqueness
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3.2.2 Art is eternal
3.2.3 Buying Arts to Encourage Talent
3.2.4 Cherish and Enjoy Forever: Value of Culture
3.2.5 Art as an Investment
3.3 General Motives for Buying Art
3.3.1 Enhance Home Decorating
3.3.2 Sign of Status
3.3.3 Art for its Beauty
3.4 Conclusion
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4. Economic Crisis
4.1 Introduction
4.2 Development of the Economic Crisis
4.2.1 Mortgage Crisis in the United States
4.2.2 Credit Crisis
4.2.3 Problems Fanny Mae & Freddy Mac
4.2.4 World Wide Banking Problems: Economic Crisis
4.2.5 Current Situation
4.3 Expected Effects of the Crisis
4.3.1 Demand
4.3.2 Supply
4.3.3 Price
4.3.4 Investment
4.4 Conclusion
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5. Methodology
5.1 Aims and Objectives
5.2 Research Questions and Central Questions
5.3 Research Strategies, Designs and Methods
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6. Results
6.1 Introduction
6.2 Overview Secondary Art Market 2005 – 2010
6.2.1 The Secondary Art Market of 2005
6.2.2 The Secondary Art Market of 2006
6.2.3 The Secondary Art Market of 2007
6.2.4 The Secondary Art Market of 2008
6.2.5 The Secondary Art Market of 2009
6.2.6 The Secondary Art Market of 2010
6.3 Comparisons of Data 2005 – 2010
6.3.1 Global Art Price Index
6.3.2 Global Turnover
6.3.3 Comparison Global Price Index and Global Turnover Index
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6.3.4 Bought-in Rate
6.3.5 Comparison Bought-in Rate Index and Global Price Index
6.3.6 Art Sales at High End of the Art Market
6.3.7 Global Auction Turnover per Country
6.3.8 Total Global Turnover of Top 10 Artists
6.3.9 Total Global Turnover of Three Top 10 Artists
6.4 Conclusion
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7. Conclusion
7.1 Introduction
7.2 The Effects of the Economic Crisis on the Secondary Art Market
7.2.1 Conclusion of Chapters 1 to 4
7.2.2 Conclusion of Chapter 6
7.3 Final Conclusion
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8. Recommendations
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9. References
9.1 Books and Articles
9.2 Websites
9.3 Internet Sources
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10. Appendices
10.1 Auction Houses
10.2 Data Collection: Excel File
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1. Introduction
1.1 In General
Until the end of 2006 or the beginning of 2007, people buy houses with high
mortgages, people borrow money for holidays in Spain or cars, people live their lives and
enjoy, nothing seems to be worth worrying about. Then the whole financial world started to
fall apart; it all started in the US at the end of the year 2006 (Egbert Kalse 2008, 2010). At the
end of 2006 and in the beginning of 2007 the mortgage crisis officially started in the United
States, that soon turned into a credit crisis influencing revenues all over the world. This
eventually resulted in a worldwide financial crisis that has influenced billions of people. The
influence of the financial crisis is sensible in the whole world, on all markets. Bankruptcy has
become an everyday thing and a lot of people have to economize. Since this crisis has slipped
into everyday life, it is not unlikely that it must have influenced the secondary art market.
Think of luxury goods 1 : when people have to economize they will in the first place stop
buying luxury goods and art is considered a luxury good. The crisis could have an influence
on the supply of art on the secondary art market: people will at first sell their artworks if
bankruptcy is closing in, so the supply of art on the secondary art market will increase.
The secondary art market; the market for art comparable to the second-hand or used
market for other products as known in general economics (Picassomio website). A piece of art
enters the secondary art market when it has been sold before and the first buyer decides to sell
it again. This market is very large compared to other second-hand markets, mainly because of
certain typical characteristics of art, like the uniqueness of art. It is necessary to know how the
secondary art market behaved before the beginning of the financial crisis, in order to be able
to compare with its economic behavior during the crisis. The economic behavior considered
in this research is about supply and demand, price and its determinants and other market
factors.
The secondary art market for 20th century art has been in a positive flow during the last
decennium of the 20th century. Increasing prices, more and more players on the market and a
lot of high prices are paid for artworks2. A trend has started: art is a good investment because
of the uniqueness of arts, it is new for a lot of people and it has at least a stable price 3. New
players on the market will result in higher prices and increasing interest by other players. Art
is not just investment in money, but also an investment in status: people’s status became more
and more important those days and buying arts is a characteristic of that. This all is a result of
economy boosts all over the world. Economies of countries like China and Russia are
increasing 4 and so the demand for art has also increased in those countries. General
economics are essential to understand what influence this has on the secondary art market.
Luxury goods are the goods for which the demand and supply are influenced by the consumers’ income.
For more information see chapter 2: The Secondary Art Market.
3
Research on art as an investment by Jianping Mei and Michael Moses (2002), Alan Beggs and Kathryn Graddy
(2008), Jennifer Highfill and Kevin O’Brian (2007) and Agnello and Pierce (1996).
4
More information can be found in Veranderende structuren in de wereldeconomie en China’s economische
integratie written by H.A. Ebbers, (2005) University of Nyenrode.
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When you are interested in economics you know that supply, demand and price are all
connected to each other. Easiest way to explain is to take a look at price elasticity of demand
and supply (economische-begrippen.nl). Elasticity shows a change in the market by changing
variables like supply and demand when there is a price change. So with more players on the
market the demand rises while the supply stays equal and the result is higher prices. The
uniqueness of artworks plays a large role in the secondary art market, since this could also
result in extremes on the market. It is a motive for buying art in the first place that art is
generally unique.
Prices for any kind of products are not just set by one person or shop or producer, they
are influenced by the market. As said before, the price of a product is influenced by demand
and supply and is the result of the market. The price can be directly influenced by external
factors of price or indirectly by external factors influencing the demand and / or supply, like
the motives of buyers influencing the demand and indirectly influencing the price of art. An
example of a motive influencing the price indirectly through demand is the aesthetic value it
has to the demander of an artwork at the secondary art market. The motives of art buyers to
buy art is an external factor of demand that could influence the price of artworks on the
secondary market and indirectly have an effect on the outcomes of a research on the financial
crisis in the secondary art market. Since most studies are mainly focused on the general
economic factors changing the prices on the market and since the external effects could have
major influence on the prices of art, these should be considered. What the influence of the
financial crisis is on the motives of art buyers is uncertain, but should be thought about.
The financial crisis has changed our confidence in the banks and has made us a lot
more careful. Does this mean people stop buying arts or is it the other way around? If art is a
good investment, it could be a lot safer to buy an Anton Heyboer instead of depositing your
money at the bank5. At the other hand, people got more careful and large expenditures are on
hold, which is bad for the economy, but very safe for your own purse. This thesis will focus
on the European secondary art market of the past ten years and take into account that more
than just supply and demand has an influence on this market. It will start with an exploration
of the European secondary art market and will end concluding whether or not this market has
been changed by the effects of the financial crisis. The effects of the prices as well as the
effects of the motives of art buyers will be considered, since the factors could have an
influence on the behaviour of the secondary art market.
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Investment in art is explored in chapter 3.
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1.2 Hypotheses
What the effect of the financial crisis is on the secondary art market can only be
elaborated when knowledge is available on how the secondary art market is constructed and
on what the main characteristics of this market are. An extensive description of the secondary
art market will be made prior to making any assumptions on the effects of the financial crisis
on the secondary art market. The position of the secondary art market within general
economics and the relation between the art market and the financial market will also be
explored extensively before going into the financial effects on the art market.
This thesis will show research on basic economic aspects influencing price as well as
on the more social aspects that could influence price. Using this research more assumptions
can be made on the relation between the art market and the financial market and the effects of
the financial crisis on this art market. The hypotheses tested in this research will lead to
answering the research question. The research question is: ‘What is the influence of the recent
economic crisis on the fine arts sold and put up for sale at auction houses worldwide in terms
of supply and demand, price and investment?’. The hypotheses are constructed as following:
1. The prices of artworks sold at auctions have decreased since the start of the
economic crisis.
2. The high end of the secondary art market is affected less by the economic crisis than
the low end of the art market.
3. The economic crisis is influencing the prices of artworks in general.
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1.3 Brief Outline of the Chapters
In chapter 2 the focus lies on the secondary art market, its characteristics and its
relation to the financial market, summarizing previous conducted researches on the secondary
art market. What characteristics of the secondary art market make this market different from
other markets? In the fourth part of the second chapter the determinants of price will come
across starting from general economics and finally looking more into the prices on the arts
market. The typical characteristics of the art market that could influence the price of art
should be considered before making any assumptions about price variations over the past ten
years. The third chapter is a focus on a very important factor influencing the price of art on
the demand site: the motives of the buyers. It is a more social approach on what the influential
factors could be, looking at the players on the secondary art market, going into motives like
social value, uniqueness of art and art as a status symbol, by using the approaches of several
researchers to discover links between art prices and the buyers’ motives. Next, in the fourth
chapter the state of the past years’ economy, during the crisis, and the current state of the
economy will be elaborated to get a better understanding of the crisis and its effects. In the
fifth chapter the method of the research will be elaborated: the what, why and how of the
chosen method will come across in this chapter. Chapter six is the results chapter, an outline
and conclusion of the quantitative research on price changes on the European secondary art
market over the past five years and chapter seven will summarize and conclude both the
results of the quantitative and the qualitative research. Recommendations for further research
will be given in chapter 8.
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2. The Secondary Art Market
2.1 Introduction
The art market is a very complicated market. Studies on this show that the
abnormalities of the art market make this market difficult to do research on. Besides that,
studying the art market is something quite new; research has mainly been done since the 80s
of the 20th century. Baumol (1986) is considered to be the founder of economic research in the
art market, although there was some valuable research done before him by Wagenführ (1965),
Anderson (1974) and Stein (1977). More details can be found in “Art Markets and
Economics: Introduction” by Bruno S. Frey (2003). Baumol’s study is the beginning of a lot
more research that goes beyond his work, but his contribution is still found in studies
published today. The development of studies of economics in the art market is at a stage of
going more into separate dimensions of the market.
Understanding the general art market will help understanding the secondary art market
and using different studies to look closely at the changing market over the past decades will
eventually show how the art market is related to the financial market. The first part of this
chapter is a historical overview of the art market, going into the ‘booming’ market of the
period between the start in 1985 and the clash of 1990 and the years after6. Later in this
chapter the attention is on the visual arts market and the division in the market, as known in
genuine financial markets, between the primary and secondary market. From that point the
step to the characteristics showing the relation between the art market and the financial
market is easy to undertake. A brief overview of supply and demand and their influence on
the price of art will be given as a starting point for the next chapter. At the end of the chapter
a brief conclusion will be given.
6
As described in chapter 9 in The Economics of Art and Culture by Heilbrun and Gray (2007).
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2.2 Historical Overview
The art market knows booming periods and periods of clashes as in any other market is the
case. Since the final goal of this thesis is to show what general economic influences do to the
art market, it would be interesting to have a look at the past. Not every single year and every
sale of art works will be researched and elaborated; the focus will be on the interesting and
booming periods of the art markets and the clashes, often following a booming period as in
the financial world is the case too (Egbert Kalse, 2008-2010). The influence of general
economics on the art market has been analyzed by several researchers over time and will give
us a certain inside on what happens on the art market during an economic crisis.
Proven by different studies done on the relation between the art world and the
financial world is that there is a certain correlation between those two things. Studying this
relation is something relatively new. The economic aspects of the art market appeared to be a
relatively uninteresting field of research until the study of William Baumol (1986), who was
the first during the 1980’s to focus on the art market boom of the 1980’s trying to relate the
economic situation and the situation on the art market. His results were published in 1986 and
focused on the price movements in the art world. This study was followed by many other
studies. The amount of research done on the art market and economics has increased over the
past decades, but it still appears to be a relatively unpopular field of research in comparison to
studies on other economic fields or markets.
Since the 1960’s research is done on price development on the art market by
researchers as Rush, Reitlinger, Wagenführ, Anderson, Stein and Baumol. Especially the
work of Reitlinger has had great influence since it has been used by many others over time.
The studies done by these researchers mainly focus on the development of prices on the art
market and the return rate of artworks. The change came with the study of William Baumol in
1986 which has a greater focus on the returns and art as an investment.
After the 1980’s, after Baumol’s research was published, more research has been done
on several periods of time in history. Frey and Pommerehne (1988) studied the period before
and during World War II and the period after World War II. Especially the period after World
War II was not only studied by them; many researchers looked at this period. Also the art
market boom of the 1980’s has been a very interesting period to study, because of the
changing art market as the result of a cyclical boom in the general economics. Many have
studied this period, even as the period of clash after that as a result of the economic crisis
started in 1987. Finally the last art market boom, the 21st century boom, is a very interesting
period to look at, as it is closest to what the results of this thesis will bring. These three
periods of time will be elaborated more in the next part, starting with the period after World
War II.
2.2.1 The 1950’s – 1960’s
The end of a world war is about rebuilding countries and regaining trust. It is about
getting back to life, finding your loved ones and searching for your future. An after war
period is not a period in which you can imagine a booming art market, although research
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proves high return rates on artworks for this period, so the market is regaining strength
(Anderson, 1974). It appears to be that there is a market for artworks in the beginning of the
1950’s probably because of the change of taste during that period7.
The oldest research done on this period was done by Anderson (1974) mainly focusing
on return rates. The study of Frey and Pommerehne (1988) also focuses on whether or not it is
wise to invest in artworks besides looking at return rates. The results of both studies show a
higher return rate for the 1950’s compared to the periods before and after. This is also
confirmed by research of Fase (1996). Frey and Pommerehne (1989) have concluded in their
research that investment in artworks is generally more interesting when taking some time,
about 30 years, before selling an artwork again.
2.2.2 The Booming 1980’s and the Period After
The financial situation of the beginning of the 1980’s was very good and this is also
shown on the art market. The stock market is in a booming phase and this is also the case for
the art market. The sales are rising higher and higher and the prices of artworks increase more
and more. Research shows that the increase of wealth in general and an increase of demand on
the art market are related to each other during this booming period (Goetzman, 1993).
During the first years of the 1980’s the demand for contemporary artworks grew faster
than the supply and this results in higher prices for contemporary artworks (Bronger, 1997).
When the economy crashed in the later 1980’s the players on the art market were afraid of the
consequences this could have on the booming art market. Although the economic crisis
started in 1987, the booming period on the art market continued a little longer. Until the
beginning of the 1990’s not much was to be concerned about on the art market, because of all
kinds of investment possibilities8.
2.2.3 The Latest Art Market Boom
In short, since 2001 the art market is rising, price indexes of all artworks increase and
the total revenue of fine art sales on the secondary art market keeps on rising (artprice.com).
The ‘bubble’ is a fact, but as generally assumed in economics one day the booming period
will end. The latest art market boom came to a peak at the end of 2007. From the first
semester of 2008 the price indexes started to decline and the total revenue of fine art sales on
the secondary art market was not rising any more. The latest art market boom will be
extensively elaborated in chapter 6.
7
The research of Buelens and Ginsburgh (1993) shows positive effects for investment in art during this period
and mentions taste change as a reason for it.
8
Even the auction houses came with strategies to make sure investment in art was still attractive for many. More
on this can be found on the website of Sotheby’s.
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2.3 The Art Market
The complexity9 of this market is what it makes it so hard to make any assumptions of
what could happen when. Whether an artist can make it or not on the art market is not just a
question of demand and supply, there is more to this. We all know that many artists weren’t
able to live of the income they gathered by making art, while after their deaths their paintings
were sold for millions of dollars. No one can explain this typical phenomenon making the art
market a complicated market. There are more issues like that; the uniqueness of art or its
heterogeneity, the irregularity of trade and the transaction- and information costs, all factors
complicating this market. Though, there are at least two components of the art market similar
to financial market standards: the division between primary and secondary art market. In
addition to this, Singer and Lynch (1994) divide the art market into three separate
components: primary, secondary and tertiary art market.
2.3.1 The Characteristics
The difficulties of the art market start with the difficulty to define art, in the case of
this thesis, visual arts. Since it seems that every definition raises new questions, it is useful to
go into some characteristics of the art market showing the difficulties. The distinction of the
art market is in the difficulties like difference in transaction- and information costs between
the art- and general financial market. The art market is special because of the characteristics
of every single piece of art; think of the lack of homogeneity severely restricting the
substitution between them10.
2.3.1.1 Transaction Costs
On the genuine financial market, the transaction costs are the extra costs besides the
product itself of all the participants in the transaction. Examples of these costs are the time
spent on exploring and discussing other options. The transaction costs make people willing to
pay a higher price if it saves them a lot of time.
This is different from the transaction costs on the art market: they could rise above
this, since the insurance, the conservation, the restoration and storage should be kept in mind.
These costs can be real high for artworks, especially for the high sales.
2.3.1.2 Information Costs
Besides differences in transaction costs there are the high information costs on the art
market, because of imperfect information. In general, imperfect information in a market is
about the participants of a transaction not being well informed about the product. Examples of
missing or inaccurate information is about things as quality, price of substitutes (products that
could replace the product you are buying), availability of these substitutes or about the later
value of the product. Gathering all this information rises the transaction costs, but not having
According to Silvia Bagdadli (2006) in her book review of Iain Robertson’s book Understanding International
Art Markets and Management in the Journal of Cultural Economics 30. 237-238
10
Mentioned by Schneider and Pommerehne (1983) as a reason for the lack in previous studies to study both
sides of the art market.
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the right information could result in such high information costs that they could rise above the
actual transaction costs.
The complexity of the art market and of the art products on this market results in very
high possible information costs. No research can give answers to possible resale values and it
is most often not possible to sell art whenever you need to.
2.3.1.3 Uniqueness
Every piece of art is unique in its own way; it is a general characteristic of art. This
uniqueness makes it hard to predict future value of the art work and so the resale values,
which are related to the transaction- and information costs of art. Art market research and
especially price research has to consider many aspects of the uniqueness of art, or often used:
the heterogeneity of art, like size, theme, quality, style, artist or the aesthetic value. The term
heterogeneity is used to describe products or systems that are built up of multiple items which
have a large range of structural variations. It is the opposite of homogeneity11. Heterogeneity
is not only detectable in the visual arts and is not only a characteristic of the artwork itself on
the art market. Also in the music business it is detected, although in a different way, on the
movie market and novel market and it is seen in the behavior of theatre attendees12.
According to Günther G. Schulze (1999) unique art is characterized by the
unavailability of substitutes. This type of art is highly durable which makes artworks easily
into collectors’ items and this results in having a very strong secondary market. This makes
unique art different from other types of art. There is an absence of economies of scale 13 in the
case of unique art: an artist can only produce one piece of art at the time and can only improve
himself by making more and more works of art.
The only way to make visual art more homogeneous is when it is divided into separate
groups: by style, period, artist or school. The problem of this dividing is the uncertainty of
dividing in the right way, since this cannot be scientifically proven. It is more guesswork and
assuming than knowing what is right or wrong. This makes it very complex when it comes to
determining the price of any artwork. Previous sales of the same artwork are probably the
only useful data when it comes to making any prognoses on the price. The unpredictability of
the art market is why investment in arts and its returns are uncertain14.
2.3.1.4 Irregularity of Trade
It is the uniqueness of art, or say heterogeneity, that makes art trade unpredictable and
complicated. As shown in the article “International Trade in Art” by Schulze (1999), the trade
of other art forms beside the visual arts is not as irregular as the trade in visual arts. This is
11
Description of heterogeneity from Wikipedia. More on heterogeneity in different fields can be found on
Wikipedia.
12
This is amongst others described in the articles by Paulo Brito and Carlos Barros (2002), Victoria Ateca –
Amestoy (2008), Jonathan Beck (2007) and Günther G. Schulze (1999).
13
Economies of scale is about the increasing efficiency of production when the number of goods being produced
increases, this to lower the costs per unit. It is a cost expansion of the production.
14
More on art as an investment in chapter 4.
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simply because heterogeneous art is produced under constant returns to scale which improves
the international production activities; however, there is an absence of economies of scale
which is not absent in most reproducible art forms. Schulze despites the fact that although the
art market is in general very much internationalized, research on this topic is done very little.
Most research in this field has its focus on reproducible art, probably because the unique art
trade is a more complex research field than the field of reproducible art. Therefore, in the near
future, research should be concentrating on the field of the unique art.
Trade in unique art is irregular and unpredictable because most of this trade is between
consumers and collectors on a secondary market. This type of trade is very much
underexposed in the traditional trade theory15 and because of this, the traditional trade theory
is not applicable to the trade of unique art. Unique art is heterogeneous and economies of
scale is absent. Simply said: trade theories do not cover the trade in art; the value of works of
art are hard to determine and the price of art is inelastic.
2.3.2 Separation of the Market
The art market has evolved over the past decades into a highly sophisticated market
with a true market structure. As known in other financial markets the art market can be
separated into at least two separate markets, the primary and secondary market. Although
more separations are made in different art market theories16, the division between primary and
secondary market is most commonly used.
2.3.2.1 Primary Art Market
On the primary art market, as it is described by Heilbrun and Gray (2001, page 169170), original art works are sold for the first time from the artist, the producer, to a consumer.
Just as in all types of financial markets the price is a reaction to the supply and demand on the
market. The transactions on this market take place in artists’ studios, galleries, art fairs and
festivals. The participants are the artists and the buyers, who are dealers and collectors.
Mainly the works of art of new artists, unknown artists, and new works of known, established
artists are sold on this market. The primary market is led by imperfect information and
unpredictable transaction costs; this leads to high risk purchases.
In the case of Singer and Lynch (1994), they have separated the art market into three
submarkets. The primary market is the market on which the artists, collectors and dealers are
active. The artists are the producers and the collectors and dealers, the consumers, buy the art
directly from the artists.
As described in The Economics of Art and Culture by Heilbrun and Gray (2001) the
primary art market is very much like any other market. There are buyers, there is a sales point,
the price is known and so the buyers can make a purchase at the sales market. The artists,
producers of the products, often have connections with galleries to sell their works of art. The
15
The traditional trade theory focuses on homogenous products between dissimilar countries and assumes
economies of scale.
16
Besides the primary and secondary art market, people use terms like auction market, dealer market and tertiary
art market (Singer and Lynch 1994).
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artist is familiar with the product and knows what he does, while the gallery, the dealer, has
knowledge of the market. Combining their knowledge will help selling the product for a good
price, with a minimum reserve price17 and the highest possible price people are willing to pay
for the artwork. Setting the price for a work of art is not as easy as it seems: the artist wants to
have the reserve price and the dealer wants have a commission too, so some extra must be put
on top of the reserve price. Although, the price should not be too high, otherwise the buyers
are not willing to pay that amount for the artwork. Heilbrun and Grey are established
researchers in the field of art and economics; therefore, to my opinion, it is essential to use
their basics on the separation of the art market. Singer and Lynch, on the other hand, have
conducted research on the auction market and so their insight into the basics of the separation
of the art market should be taken into account as well. It is essential to consider that there are
differences among the interpretations of different researchers in the field. Further in this thesis
the interpretations of Heilbrun and Grey are used as basics for further theories, because their
interpretation is more common in the field of art and economics.
Setting the price for an artwork of an established artist is different from setting the
price of a work of art of a new artist. In case of the established artist you could look at his past
sold works, at the prices of similar types of artworks and the dealer can use this information
when selling the work of the established artist. In the case of a new artist the dealer will
decide to keep prices low, especially when the works are for sale for the first time in order to
getting to know the market for this new artist’s work. A large part of the value of an artwork
is in the time and effort the artist has put in it; this is almost impossible to measure and so it is
very hard to set prices for new artist’s artworks.
2.3.2.2 Secondary Art Market
The secondary art market could be described as a second hand market for works of art.
On this market, in contrary to the primary art market, a lot of information is available on the
works sold here. Artists do not play on the secondary art market, the artworks made by them
do. In many cases the artist is not even alive anymore when his works are sold. The secondary
art market is in comparison to the primary art market not risky, because of all the available
information (Heilbrun and Gray, 2001).
The information costs on the secondary art market are, nowadays, not very high,
although this was very different a couple of years ago. This because of certain recent changes
on the art market. Galleries display the prices of works of art nowadays and auction house
commissions decreased past years. Keeping the prices from potential buyers, on the other
hand, was a way to raise prices willingly not known by the consumers. Showing the prices,
the way it is most often done nowadays, prevent that potential buyers are being betrayed and
it makes the art market more transparent18.
17
The reserve price is the minimum price the artist is willing to accept for his art work.
Transparency on the market means that all information is available on the product, the price and on the place.
Without transparency a free market is not possible. The degree of transparency is different for every segment of
the market. The degree of transparency is different for the primary and secondary art market.
18
15
On the secondary art market art is traded for the second time, or more of course, and
this most often happens by putting the artwork up for auction. In an auction the highest bidder
will eventually buy the artwork for the bidden price. The phenomenon of an auction, people
bidding on an object until only one potential buyer is left, is known for a very long time. 500
B.C. women were put up for auction to marry them; records of these auctions were found
(Krishna, 2002). The role of the auction houses in the secondary art market is very important
and therefore the secondary art market is often recalled as the auction market.
The secondary art market is closely linked with auction houses, although it is not for a
hundred percent about auction houses. The auction houses are used when the art market has
no breadth and no depth for a certain work of art19. In this case no price can be set on the
general art market and the auction house is needed to bring demand and supply together in
order to come to a good price. Nevertheless the price set at the auction by bidding might be
the best price for the seller of the artwork, it is not necessarily the best price for the buyer of
the artwork (Michael Beckmann, 2004). Especially when the sale of a work is affected by
bidder cartels20.
Even though the art market is most often divided into two separate markets, the
primary and secondary art market, Singer and Lynch (1994) make a division of the art market
into three sub markets. According to them the secondary art market is the sub market on
which dealers and collectors are active. The dealers sell art to collectors and the auction
houses do not yet play any role until the artwork has passed the dealer market and enters the
art market again.
The dealer market, as the secondary art market is called by Singer and Lynch (1994),
is dominated by independent dealers. Their role in the art market has grown enormously over
the past few years, which was shown clearly during the booming period of the 21st century.
They work independently and have their own clientele for whom they do the selling and
buying of artworks on the art market. The dealer market is not transparent and has something
mysterious since not much can be looked into (Baumol, 1986). Dealers on the art market have
the ability to mess with demand by pushing their clients into certain directions when they are
looking for artworks to buy. They know exactly how to influence art consumers (Ben Lewis,
2009). It is clear that dealers can influence the art market in several ways; it is shown that they
even create artificial scarcity of artworks made by artists they represent as dealers. These are
the type of actions with high consequences when they appear in another segment of the
financial market. It nevertheless shows that art dealers are able to knowingly and
unknowingly influence the demand as well as the supply on the art market.
19
With market breadth one speaks of the numbers of buyers and sellers on the market and market depth is about
the number of possible substitutes for the product on the market. The imperfect substitutes are taken into account
in this case as well.
20
Like in any other market cartels can have a negative influence on the free market. They make deals in order to
influence the pricing of works of art in the auction market. More on this can be found in the article of Michael
Beckmann (2004).
16
2.3.2.3 Tertiary Art Market
The tertiary art market is, according to Singer and Lynch (1994), the market at which
dealers and collectors recycle artworks, that have past the secondary art market, through
auction houses. Singer and Lynch share the idea that the tertiary art market is the auction
market, so not the secondary art market, on which works of art produced in the past are
traded. All works of art that have passed the primary art market and the secondary art market
and after that found the access to the auction houses have entered the so called tertiary art
market. This is only a small proportion of all artworks ever entering the general art market.
Singer and Lynch claim that art at the secondary art market have limited liquidity whereas the
art at the tertiary art market is liquid21.
21
Liquidity is the relation between the amount of financial resources (of a bank) and their short term obligations.
17
2.4 The Financial Market
In general economics, the financial market is the place, the mechanism, where people
buy and sell goods (Klamer, McCloskey and Ziliak, 2004). Other concepts used for the
financial market are transaction market or trade market, because trade takes place at this
market between the buyers and sellers of goods. Not only goods, as food or cloths are traded
at the financial market, also stocks or bonds and fungible items of value are traded at the
financial market. The trade takes place for the lowest possible transaction costs and at a price
formed by the market. The price is formed by supply and demand. Five features are necessary
on any market: the item, the demanders, the suppliers, the price and the means of payment.
In short: the item can be a product or a service that is supplied or demanded on a
market. This could simply be the gas you need for your car, or getting a haircut at the
hairdresser, but it could also be buying shares of stocks at the Stock Exchange. Goods or
items can be separated into different types of goods. The demanders are willing to pay for the
item and the level of demand influences the price as the level of supply does too. The
suppliers are the owners of the goods who are willing to sell it. The item the supplier wants to
sell and the demander wants to buy will eventually be sold for a certain price formed by the
market. The buyer will pay this price using an acceptable means of payment which in most
cases is money, but also could be another good or service. It is an exchange that takes place at
the market.
Markets are important to everyone since this is what has an influence on the shape of
our economic lives. Understanding that one should think of what economic decision you have
made in the past and influences your daily life at this moment, everyone will come to the
same conclusion: every economic decision in the past has influenced your economic life. The
markets allow us to be collectively richer, since they encourage specialization on all fronts.
The result of specialization is that everyone can work on the thing that one is most talented
for and interests one. As Adam Smith (1776) has recalled to: ‘the division of labor’ in which
the beginning of trade in that way is explained. One specializes on one field and exchanges
his products for money or other products, and using the money to buy products. To Adam
Smith this was modern economy. The markets promote a healthy independence in this way.
Markets work by economizing on love; a market decides on its own and is in the
basics not influenced by any other thing than itself. The market moves by the invisible hand
(Chandler, 1977). The invisible hand makes that the price reconciles the competing interests
of the buyers and the sellers of an item, a good or service, well-known as the market system
price mechanism. Simply said: when the price of a product rises, the supply will increase and
the demand will decrease, or when the price decreases the supply cannot fulfill the rise of the
demand; there are not enough goods. At a certain price the demand and supply will meet and
at this equilibrium it is best to sell the good or service. The demand and supply work
separately from each other and do not have knowledge of each other’s doings, the only
information they share is the price. This is in the middle where demand and supply meet.
To get a better understanding of the price of a good it is useful to start with a
separation of the different types of goods, since the characteristics of a good influence the
18
demand and supply of that good. At this point it might seem that it is much of general
economics, but since the economics of arts and culture could differ on these basic economic
concepts, to my opinion, the elaboration of these concepts is an essential addition to this
thesis.
Using the separation of goods as a starting-point, demand and supply will be
elaborated. At first generally and later going into the different types of goods and finally
focusing on the secondary art market. Since price is where demand and supply meet, this will
be handled in the fourth part. Price determinants influencing the pricing of artworks will
finally be elucidated.
2.4.1 Goods
As mentioned above, the item on the market supplied and demanded can be a good or
product, a service or a stock share. There are different types of goods and these goods have
different characteristics. The difference in characteristics of the goods will eventually result in
differences in supply, demand and in price.
Substitutes are goods that have the ability to replace another good, for example you
can replace a cup of coffee for a cup of tea. A substitute of a product (A) should be able to
satisfy the same needs the product (A) satisfies for the consumer. In economics the opposite
of substitute goods are complementary goods. When a good is needed for another good or is
dependent of another good it is in most cases an example of a complementary good. A good
that is in general used in conjunction with some other good, is a complementary good. An
example of a complementary good is gasoline to a car (Adriaansen, 2000).
In economics one speaks of normal goods when income changes are taken into
account looking at the market. Simply said, people will buy more normal goods as their
income increases. The opposite type of good to the normal good is the inferior good. When
your income rises, you have more money to spend and you will probably buy more of
everything, but there are exceptions to that. The exceptions are inferior goods, goods you will
stop buying or buy less when your income rises. The demand is decreasing when your income
increases since the consumer will replace the good by a good of which the quality is a lot
better. The typical example of an inferior good used by many economists is potatoes, also
known as poor people’s food22.
Besides normal and inferior goods there are luxury goods; they are considered only to
be bought when income has raised to a certain level. Luxuries are goods that are never or
rarely consumed when the income is below a certain level, but the part of the income spent on
luxuries increases when income increases. When the amount of income has reached a higher
range, a part of the budget is spent on luxury goods. Still, certain products are generally
22
Especially in Ireland before 1846, although recent studies show otherwise (Klamer, 2004).
19
considered to be luxury goods, like art. You don’t need it, it is no necessity23, it is something
extra and that counts for everyone, whatever one’s income is.
2.4.2 Demand
The demand site of the market is about the people wanting products or services, the
ones who are willing to pay for it, the consumers. The willingness to pay24 of the consumer
will decrease when the price of a product or service increases. A higher price is bad for them,
it will make them search for alternative products.
2.4.2.1 Demand and Goods
The shift of the demand curve can be different for different types of goods in different
situations. The demand of a substitute goods will change in a different way than the change of
demand of two complementary goods. In the case of a substitute, the demand of one of the
goods will increase when the demand for the other decreases. In the case of the
complementary goods a positive change of the demand of the first good will result in a
positive change of demand of the other good. In the cases of normal goods, inferior goods and
luxury goods, the demand will change when the income of the consumer changes. A higher
income will make the demand for normal goods increase and the demand for inferior goods
will decrease in this case. The demand for luxury goods will increase with bigger steps than
the increase of income.
2.4.2.2 Demand in Secondary Art Market
It is generally assumed that art is a luxury good25. There is not just one type of art26, so
the demand for art could be divided into several submarkets for different niches. General taste
change could therefore change the demand for art and also the change of availability of
money could influence the demand for art27. There are several demanders and they all have
their own final goal when entering the art market: museums, investors, dealers and collectors.
They all have their own reasons for buying works of art and because of their diversity price
construction is difficult (Heilbrun and Gray, 2001).
The museums as demanders on the secondary art market are very important for the
art market. Although they are depending on funding and subsidies, they tend to buy art at
times of demand peaks. This because of the high hammer price28. For the museums buying the
artworks it is not about investment, it is purely an increase of their collection. Museums are
mainly interested in high quality artworks; this makes the demand inelastic.
23
Necessity: basic goods you need to survive and do your jobs with. This is obviously foods and drinks, but also
the car for a taxi driver and the baking oven for the baker.
24
The Willingness To Pay, in economics often named WTP, is about the maximum amount people are willing to
pay of exchange for a certain good.
25
Simply said: when income increases, the demand for luxury goods rises.
26
There are all kinds of styles of art and for all styles there are separate markets, different buyers and sellers.
27
All demanders are influenced by what financial means they have available at the time.
28
Hammer price: the price at which the item is hammered down and the highest bidder is then the potential
buyer of the item. In case of a low hammer price the possibility exists that the reserve price (the lowest price the
seller is willing to accept for the item) is higher than the hammer price. There is more on this item in the
appendices.
20
Investors more often invest in art during a booming period, because of high return rates in
these periods. The availability of information is of high importance for investors.
Dealers on the demand site can influence the demand positively as well as negatively. There
is a lack of transparency on the dealer market29.
There are two types of collectors on the demand site of the secondary art market: the
profit oriented collector and the private collector. The main difference between those two has
to do with the return rate of the art they buy. For the profit orientated collector, who most
often works for a large company, buying artworks is to broaden the company’s collection and
the economic value of the artwork is important in that case. The private collector buys art to
broaden his own, personal collection and in that case it is purely about the aesthetic value of
the artwork (Frey, 1995). Collectors are in general wealthy people with a well above average
income who could be less affected by an economic crisis in daily life. Although their losses
are high, they might still be able to continue living the way they lived their life before the
crisis.
2.4.3 Supply
On the supply side of the market the suppliers decide what they are willing to supply
at a certain price. The suppliers are the producers of the goods or services and they enter the
market with their items to sell them. The suppliers want the highest possible price for their
goods in order to maximize their profit30.
2.4.3.1 Supply and Goods
The supply curve will shift differently for different types of goods. There is not so
much difference between what happens to the demand curve in the case of different types of
goods and what happens to the supply curve. For substitutes and complementary goods it is
the same as what happens in the demand case.
Since changes for normal goods, inferior goods and luxury goods are strongly
dependent to one’s income, it does not have influence on the supply. Consumers’ income do
not influence the supply side of the market and because of this changes at the supply side are
not directly an effect of changes concerning normal, inferior and luxury goods. It is not
unthinkable that suppliers of luxury goods will produce less when incomes are generally
declining, as could happen during a period of economic downturn.
2.4.3.2 Supply in Secondary Art Market
The artworks supplied on the secondary art market have been supplied before, so the
suppliers of the products are not the producers, in the case of artworks, the artists. On the
secondary art market the suppliers of art are dealers and collectors, directly or indirectly
through auction houses. The auction houses are in most cases the suppliers on the secondary
art market, naturally directly or indirectly (Heilbrun and Gray, 2001).
29
The dealers market is extensively discussed in chapter 2.3.2.2.
Profit = sales revenue – expenses, so the higher the demand, the more they sell to a high price, the higher their
profit.
30
21
The dealers31 as suppliers of art at the art market are the dealers working for collectors
not doing their own selling. The dealer makes sure he has enough knowledge of the possible
market for the artwork he has to sell. Having his own group of clients he does not necessarily
need the auction houses, but this could lead to an unfair pricing of the artworks. The
collectors as suppliers can be profit orientated collectors or private collectors. The profit
oriented collectors often work for a large company and sell the art from the company
collection. The private collectors are mainly focused on the aesthetic value of the artworks
and only sell when searching for something else. For them the investment rate is not
important.
The two main suppliers of art on the secondary art market are the two largest auction
houses Christie’s and Sotheby’s. These two auction houses from English origin have
departments all over the world and cover the largest part of all secondary art sales32. Christie’s
and Sotheby’s use the English auction system for their auctions. In the English auction system
the biddings start low and as long as bidders keep on bidding the price will go up until one
bidder is left. At that price the artwork is ‘hammered down’ as they name it. The price at
which the artwork was hammered down is the hammer price (Orley Ashenfelter, 2003). The
hammer price is not always the price at which the item is sold. After hammering down an
artwork the reserve price, set by the seller of the artwork, must have been reached, otherwise
the work will be bought in and the highest bidder goes home empty handed.
2.4.4 Price
In general economics supply and demand never really meet each other; the only way
they are connected is through price. Supply as well as demand, each can separately influence
the price of a product or service. Simply said: the price is the payment one gives to another in
return for a good or service. There is a difference between the price that is asked for a product
by the seller of the product and what price eventually is actually paid for the product. There
are three different prices used in economics: (a) the selling price, (b) the transaction price and
(c) the buying price. The price of products is influenced by the market. The amount supplied
and demanded of a product influences the price of this product. The elasticity of the product
plays a role in this.
2.4.4.1 Price Elasticity
Price elasticity of demand shows the change, in percentages, of the demand of a good
when there is a price change in percentages. In this, the change of price is the cause of the
change of demand. The demand can be elastic or inelastic. When the change of the demand is
not as strong as the change of price, it is called an inelastic demand. Besides price elasticity of
demand there is also the cross elasticity of demand. The cross elasticity of demand is used for
complementary goods, like coffee machines and coffee. The cross elasticity of demand or
cross price elasticity of demand is about the reaction of the demand of good A. to a change of
price of good B. Or the other way around.
31
The dealers are in this case the private, independent dealers also mentioned in the part above on the secondary
art market.
32
There are some exceptions of sales at the auction houses of primary art.
22
Heilbrun and Gray (2001) talk about price elasticity of demand and the expectations of
it for the performing arts. Price elasticity of demand for consumer goods is depending on two
things, availability and the quality of substitutes. This is also the case for the performing
arts33. When taking the performing arts separately, it shows not so many substitutes available,
because every performance is different and even though the economists would not say it, taste
plays a role here too. Heilbrun and Gray (2001) expect a relatively price inelastic demand
here. Besides this one should not forget the determinant time. When one visits a theatre play,
this person cannot do anything else at that time. As also said, time is money, so time is a
valuable determinant. According to the economics the value of time grows when the income
grows; when earning more money per hour, your hours become more expensive to spend on
something else than your paid job. The view of Heilbrun and Gray can easily be translated
into the visual arts market.
Concluding from this, when performing arts are luxury goods and taking the
determinant time in consideration, one can that the outcomes for the performing arts do not
differ from the outcomes for the visual arts. It is possible to say that there is only a slight
difference between the performing arts and the visual art market. Works of art are, as well as
the performing arts, luxury goods, so the income elasticity of demand will probably be around
one. When you look at visual artworks, there are no perfect substitutes available, so one could
conclude that there is a relative price inelastic demand for art works.
2.4.4.2 Price in Secondary Art Market
It is generally assumed that goods on the secondary art market are luxury goods and
therefore one could assume that the price elasticity of demand of products on this market is
inelastic. The price of artworks is not so easy to determine since there are many factors
influencing the price. Factors influencing the price directly are the players on the market, the
amount of suppliers and demanders. An example of factors influencing the price indirectly are
the motives of art buyers. The art market has several niches and the prices of artworks differ
for the different niches. When there is a general change of taste, there is a shift of demand
detectable in the art market. A change of demand will probably lead to price changes.
The price of artworks on the secondary art market is often constructed at an art auction
house. In an auction house the supply and demand meet at the hammer price, although the
item put up for auction is not always sold at the hammer price. According to the annual
reports of artprice.com about 35% of all items are not sold, but bought-in.
2.4.4.3 Price Determinants
Determinants of the price influence the price paid for an artwork separately and
therefore they should be elaborated a little more. Determinants for the price of an artwork are
according to Rengers and Velthuis (2001) to be found on three different levels: first on the
33
They first say something about the entertainment sector as a whole of which the performing arts is a small
part. Everything one can do in one’s leisure time is a part of this entertainment sector, so there are a lot of
substitutes of good quality available. They expect a high price elasticity of demand there. Since the performing
arts are one of a kind and since the comparison to film or other sorts of recording of the performance is hard to
make, it seems to be better to take the performing arts out of the entertainment sector and look at it separately.
23
level of the art work itself, secondly on the level of the artist and finally on the level of the
gallery. This is a new approach to the subject of price determinants; earlier research of,
amongst others, Pesando (1993), Buelens and Ginsburgh (1993), Baumol (1986) and of Frey
and Pommerehne (1998) shows a different approach. The approach they used is making a
comparison between return rates of investments in arts and the return rates of investment in
traditional financial products. Only taking into account the return rates is according to
Velthuis and Rengers (2001) not complete enough to prove influences on the price of
artworks. They take many different determinants into their research and their model shows
that some are very important. The size of an artwork is very important when analyzing on the
level of the artwork, therefore a closer look into size is taken.
Size is one of the characteristics of the artwork possibly influencing the price of the
artwork. There are a lot of possible characteristics that all influence the price in a way like the
subject, the size, the auction house of sale, the artistic merit, the uniqueness of the work and
many more. Not all characteristics are used in every research and not all the characteristics
have great influence on price. According to Reitinger (1961 & 1970) size is the most
important characteristic of an artwork influencing the price of an artwork. The size has
significantly more influence when the price of the product is lower. The determinant size is
not very effective in case of top works. The determinant uniqueness is in case of top pieces
more often influencing the price. The supply is low, the demand relatively high and so the
price is high.
Reitinger (1961 & 1970) also uses the determinants time and artist reputation as an
influential factor for price. The time argument is about the moment of the purchase of an
artwork; the economic situation at that time plays a role in the price construction. Besides that
the general taste changes over time, which could also influence the price of an artwork of a
certain niche. The factor time is often used in research focused on exchange rates and price
movements in the art market. The reputation of the artist is considered to be of high influence.
Whether or not information is available of previous sales of the artworks of a certain artist
does influence the willingness to buy an artwork of this artist. The more information
available, the higher the willingness to buy and the higher the price.
24
2.5 Conclusion
A lot of information has been given and many different subjects have been elaborated
in this chapter in order the make the coming information easier to understand. Having
background knowledge and understanding ins and outs of a subject makes it easier to go
deeper into that subject. As the information availability is essential to art buyers, the
availability of information is also essential to readers of this thesis.
In short: this chapter started briefly going into some, historically seen, interesting
periods of the past decades. The most important changes on the art market, financially or
economically seen, have been discussed in order to use the information when looking at the
most recent changes on the art market and to make comparisons. Understanding the general
art market is essential when wanting to understand the secondary art market. Therefore some
art market characteristics have been discussed in the following part of the chapter. I conclude
that the importance of some characteristics is greater than was thought on forehand. The
characteristics of art like irregularity of trade, uniqueness, information and transaction costs
and the availability of information are of large influence on the art market in general and on
the secondary art market. These influential factors have an influence on the price of art on the
secondary art market.
Other factors influencing the price of art were described in the final part of the chapter,
which goes into the financial market. In this part goods, demand, supply and price are
extensively elaborated and linked to the secondary art market. From general economics to the
art market economics and from demand and supply to price. Price is, actually, where it is all
about, because at the end we want to know what influence the economic crisis has had on this
price during the past couple of years. Some determinants that influence the price of art are of
such importance that they have to be considered when conclusions are drawn on the influence
of the economic crisis on the secondary art market. The determinants of great importance are
detectable on three levels: on the level of the artist, on the level of the artwork and last, but
not least, on the level of place (selling place). Concluding, the most important determinants
influencing the price of artworks are (1) the size of the work, (2) the reputation of the artist
and (3) the return rates. The question remains: which one influences the price most?
Using the given information from different studies it turns out that the reputation of
the artist is of greater influence to the price of the artwork than the size or investment return
rate. The size is of greater influence in the case of the lower priced art then in case of higher
priced artworks. So the influence of the size of an artwork is very fluctuating and
unpredictable. The influence of the reputation of the art turns out to be significantly to the
price of an artwork. The better the reputation, the higher the price. Return rates differ per
year, per period and are completely unpredictable. The only thing sure about the return rates is
that they are higher during booming periods, but you never know for sure when a booming
period is coming or going.
Conclusion, the price determinant of the highest value influencing the price of
artworks mostly is the determinant artist’s reputation. Therefore must be said that the
availability of information is of great importance, because that could indirectly influence the
25
price of an artwork. A dealer working for a new artist will put a lot of effort in spreading the
name of the artist, because this will lead to an increase of the economic value of the artist’s
work.
26
3. The Motives for Buying Art
3.1 Introduction
In this chapter the focus will be on the motives of the people who buy arts and on how
these motives could influence the price of artworks. The prices of products are not just set,
they are influenced by numbers of different factors. The market determines the price of
products for a large part, but in the case of the secondary art market there are more factors that
influence the price of the artworks sold at the secondary art market. One of these factors that
could influence the price are the motives of the buyers of artworks. Since the motives for
buying arts are different from the motives for buying general products, it seems very
important to consider this factor when drawing conclusions about changing prices in the
secondary art market.
The motives for buying works of art all influence the price of art in their own way, so
they will all be described separately. First they will be divided into two categories, (a) the
motives of the contemporary art buyers and (b) the motives of general art buyers. The first
category is a top ten list according to the research of an American website among
contemporary art buyers (artintime.com). The second category shows a list of motives or
reasons for buying art according to the buyers of all types of arts, written in an article on
reasons for buying art. Going into the two categories of motives should lead to answering two
different questions: (1) What are the main motives for buying arts and (2) which of these
motives could have an influence on art prices. These two questions will be answered in the
conclusion of this chapter.
27
3.2 The Motives of Contemporary Art Buyers
The top ten list of the research of the American website artintime.com shows motives
that will indirectly influence the price of artworks. When people are, for example, willing to
pay more for an artwork because of the fact that it is valued as eternal, this influences more
than just the price of that artwork; it will also influence the demand for this work and the
interest in other, related34, works. In the end it is possible that the it influences a certain part of
the art market. It is very important to know what could influence the price, since it is not just a
simple structure of supply and demand. The top ten list created after an American research on
buyers’ motives shows the following: (1) uniqueness of art, (2) art is eternal, (3) it is time for
another Renaissance, (4) encourage talented artists, (5) too many artists are ignored during
lifetime 35 , (6) cherish and enjoy forever, (7) the best could be alive today, (8) good
investment, (9) perfect present for people who already have everything and last, but not least
(10) a print of a painting is definitely not the same as the real thing. The motives are collected
by conducting research on motives for buying arts in American Galleries and making a
general list. This list was presented among their own clientele who were asked to value the
motives. The order presented above is the result of the research36. Besides the motives from
the website there are, of course, other reasons to buy art. For example just because of the
beauty of an artwork or because you just need to collect certain things.
Some of these motives will be discussed separately, in more detail, to see whether or
not it could have an influence on art prices in general and how this could influence the price.
Some of the motives are clear just by looking at them or will not be of that high influence on
the price of art and so not that interesting for this research, therefore not all motives are
discussed in detail. We will also see whether we can find out whether or not the influence is
that large that it should be taken into consideration when drawing conclusions on general
price changes on the secondary art market.
3.2.1 Uniqueness of Art
Art is unique. We all say this, because of most artworks only one copy is available.
There is only one ‘La Guernica, 1937’ by Picasso37 (Walter, 2000) and only one ‘Fountain,
1917’ of Marcel Duchamp38 (Buskirk and Nixon, 1996) and if you want to have one of these,
you will have to pay a serious amount of money. There are not so many artworks of which
more than one copy is available on the market. There are of course some exceptions, but this
will in most of the cases result in a lower price. You should think of silk-screen printings in
this case; these are often less valuable because there are often more than a hundred copies of
one silk-screen print. Another example of artworks of which more than one copy could be
34
Related because it is made by the same artist or because of the style of the work.
Information on this can be found in “Genius Ignored” by Lucius Furius.
36
The ‘art in time’ website is of the gallery that focuses on the sponsoring of contemporary artist with an
exceptional talent.
37
Picasso is one of the best selling artists of the 20th century and has had a number one sale classification several
times over the past five years. For more information: the annual reports of artprice.com.
38
This toilet bowl is always an item of discussion: is it art or is it not? It is often used as an example during art
classes.
35
28
made are foundered statues. Also in this case it is often that the more there are the lower the
price each.
There are, naturally, also exceptions in these cases. Take, for example, the statue by
Giacometti, ‘L’Homme qui marche’, which was sold at Sotheby’s in London in 2010 for a
record price of 74 million Euros. Most interesting is that there is more than one copy of this
statue available. Giacometti has made a series of six statues in 1961, before his dead, and after
he died in 1966 several more copies are foundered by others39. So there is a serious doubt
about the uniqueness of this artwork and still extreme amounts of money are paid for it. These
extreme amounts could influence average prices on the secondary art market and that should
be considered when jumping to conclusions.
In general, the artworks sold at the secondary art market are unique and this
uniqueness makes it more valuable. The question is whether or not to take exceptions as the
Giacometti statue into consideration. As also questioned in the article “De Giacometti Hype”
(Tibo, 2010): is it just a hype or is he really ‘The’ artist of the past century? Is this price an
exception or are there more examples? Well, more of Giacometti’s statues have been sold for
enormous amounts of money and the price of such a sale is about one moment of time. In this
case probably all the influences were positive at exactly the right time and place. It is no
guarantee for the future of sales of Giacometti works. It is important to think about this kind
of happenings on the art market, since it questions uniqueness as an influential factor.
3.2.2 Art is Eternal
Saying art is eternal sounds rather vague, but it is the second motive on the top ten list
of the website artintime.com, so art buyers consider it to be highly important: ‘art is eternal’.
Well, eternity is not something you could say about a car or a bottle of Coca Cola: your car
will eventually break down and your Coca Cola is probably not very tasty anymore after 2
years at the max. An artwork is something you can have your entire life and pass to your
children, who can pass it on to theirs. Buying an artwork is an investment you make for a very
long time and not just to consume it and after that it is gone.
When something is eternal, it is forever, for eternity, which is a timeless state. For art
lovers and buyers of artworks this is one of the main reasons to buy a piece of art. They will
have that piece forever and the story the work of art is carrying with it will forever be in it. A
piece of art tells a story eternally to anyone interested and this is an aesthetic value 40
collectors search for in art. On the other hand it is not highly impossible that an artwork you
buy will not be seen as an artwork in 50 years and not worth a dime by then. This is the risk
you take as a buyer and therefore you should not value the eternity of art too high.
39
The Giacometti statue is spoken of a lot, because the sales records are high even though there are several
copies, the uniqueness theory does not work for this statue.
40
More on aesthetic value in part 3.2.4.
29
3.2.3 Buying Arts to Encourage Talent
A lot of people consider it important to keep supporting upcoming artists. Supporting
talent in all possible fields is important for the future of the world and artists are often only
recognized after death or after a very long time. In all kinds of ways talent is encouraged,
through schooling, by parents, in business and through other channels. Encouraging talent is
considered to be a good way to control the future somehow and therefore a lot of financial
means are spent on it. Companies organize traineeships and the government, in general,
spends a lot on education. Artists are often not so much sponsored or encouraged in that
way41.
For new talents there are, in the Netherlands, some possible subsidies to make a start
on the art market. Since banks are in general not so generous with loans for starters, there is a
special subsidy for starting artists in the Netherlands. This subsidy comes from the
Rijksoverheid (the general government) and is called the WWIK (Wet Werk en inkomen).
One can use it to make a start in your career or you can use it when you need a boost during
your career. The maximum duration of this subsidy is four years (Rijksoverheid website).
There are two foundations, closely related to the Dutch government, that give subsidies in the
visual arts scene: The Mondriaan Stichting and the Fonds voor Beeldende Kunsten,
Vormgeving en Bouwkunst (BKVB). The Raad voor Cultuur (Council of Culture) in the
Netherlands is the advisor of the government concerning the subsidies on the art market
(cultuursubsidie.nl).
The WWIK is a subsidy to be able to make a start to their careers and to enter the art
market. The first step is taken, but nothing of these artists has been sold yet. Useful could be,
for a beginning artist, to have someone to help him, someone who knows the art market and
knows where you should search for your potential buyers. This helping hand can be an
independent dealer or a gallery. The negative aspect of this is that they want to have a fee for
the work they do for you; the positive is that they will probably have quite a network of
potential interested buyers. A dealer will in case of a new artist choose to keep the price
relatively low, so it is more interesting for potential buyers to buy the artworks. As soon as the
new artist is known a little more on the market, the price will rise naturally (Heilbrun and
Gray, 2001, p. 170).
Since the start of the economic crisis and the banking crisis in the Netherlands; it was
necessary to make large injections into the Dutch economy. Money had to be spent by the
Dutch government in order to have the economy going. The result of that is the necessity of
cost-cuttings later on. The time has come and the end of all subsidies on culture are near! The
result is no more subsidies for starting artists and less possible education places for artists
(Rijksoverheid website).
The market for new artists will grow in booming periods, because the return rates are
proven to be higher in that time. The return rates for the lower priced artworks are higher than
return rates for higher priced art; this will lower the risk of buying art of new unknown artists
41
Subsidizing young artists does happen in some countries, like in the Netherlands.
30
(Baumol, 1986 and Stein, 1977). The buyers of art consider it to be of high importance to
stimulate the new artists, because the market can expand in that way and new artists will get
better chances. You never know, they might be a new Van Gogh or Picasso!
3.2.4 Cherish and Enjoy Forever: Value of Culture
Another motive for buying art can be the value it has to one person. This value is more
than just the price of the artwork, more than the economic value. Concepts like value go much
further than just the price given to a product or like usually thought the price for a product
constructed by the free market. In the arts this is a much more complicated issue, since it is
not only the price, but also the value people give. It is, besides a matter of economics also a
sociological issue. There is besides economic value also the intrinsic (from the inside out)
value and the extrinsic (from the outside in) value to consider in the arts.
Klamer (2009) has written a lot on cultural value and he points out the difference
between the view of the romantics and the realists. This is mainly based on cultural
organizations and the people working there but it is applicable to the issue of value in general.
Since the romantics are the more socially oriented people and the realists are the more
economically oriented people, the realists have other values than the romantics and that is the
main issue here. There are different approaches and so different values. The romantics care
more about the cultural value of a product, so the meaning of for example a painting to a city
can weigh more to a person with a romantic view than the price in money the painting is
worth. At the other hand a person with a realistic view would rather say that the price is all
that matter, so it is about the economic value.
Cultural value can be, according to Geursen and Rentschler (2003), looked at from
two different dimensions. You can look at cultural value from an aesthetic point of view and
from a neoclassical economic point of view. The aesthetic view is about the sociological side
of cultural value and the neoclassical economic view is about the money and economics. The
value important to private art collectors is the aesthetic value, not about what it costs in
money, but what it gives sociologically. An artwork should add something to someone’s life
besides its value in money. As Hutter and Throsby (2008) argue in their book: ‘there is value
beyond price’. They show this bringing all kinds of discipline together (Velthuis, 2008).
Hutter and Throsby also make a distinction between intrinsic and extrinsic value.
Economic value cannot be put aside, since market forces are always playing a certain
role. Besides economic value and cultural value there is also social value. Social value is
about relationships and status of people. One of the most important aspects of this is
recognition in a world, being in the world you belong to. Social and cultural value are closely
linked to each other, but they are not the same thing. Defining ‘culture’ or ‘cultural’ is very
difficult and that makes it very hard to point out the differences between social and cultural
value (Klamer, 2009). The value people apply to an artwork has to be an issue in the results of
this research, because some parts are not measurable and so not included in the results.
31
3.2.5 Art as an Investment
More attention should be paid to the intensiveness of buying art as an investment of
money. Since the trust in banks has decreased due to the crisis, this could lead to more art
buying of wealthy people, although if proven that revenues are low or not even existing. The
articles by Jianping Mei and Michael Moses (2002), Alan Beggs and Kathryn Graddy (2008)
and by Jennifer Highfill and Kevin O’Brian (2007) go into the issue of investing in art: is this
profitable or not? According to Agnello and Pierce (1996) art as investment is a motive for
buying artworks. They claim that, although earlier research has shown otherwise, investing in
art can have a positive result.
Making an investment in stock is about considering two major things: risk and return.
Research on investment in artworks should do the same thing to make a reasonable
comparison with stock investments. On average risk and return influence each other in the
same direction: the higher the risk the higher the return rate. People willing to take some risk42
are more likely to gain a high return rate (Heilbrun and Gray, 2001). What is the case for art?
Is the investment in a painting risky or not and what about the return rates? Several studies,
mentioned in the previous paragraph, have shown some insight in this matter, but the
conclusions differ a lot.
Investment in art is considered to be risky, since not one thing is sure about the return
rates for art investment. There have been periods in time at which the return rates for art
investment were very high, but at most times losses are more obvious than profits. It is
generally accepted that art investment is not only about buying and selling an artwork at the
right time, since taste plays a role in it as well (Reitlinger, 1961). The major problem is the
unpredictability and immeasurability of taste which leads to the losses and riskiness of art
investment.
Baumol (1986) concluded from his research, using the data collected by Reitlinger
(1961) and going further on that, that the return rate was 0,55% on average over a period of
300 years. This is by far less than you will get for your ‘no risk’ savings at the bank. Using
this information, even though there were some years at which return rates made it to 25% or
higher, one could say that investment in art is very risky and this risk is not at all compensated
by high returns! Baumol says the only high return rate one can get from art by certainty is the
high rate of aesthetic value one could get from an artwork.
Frey and Pommerehne (1988) also used Reitlinger’s (1961) dataset for their research
and they included recent data to make it up to date. According to their research on the return
rate on art over a period of 335 years, the average return rate is 1,5% per year. Only looking at
the period after WWII, the return rate got a little higher to a rate of 1,6% per year. Their
conclusion that investment in art is no easier than any other risky investment, since nothing
can be said about the return rate on forehand.
42
Risk neutral or risk seeking investors are willing to take a higher risk for higher return rates.
32
There are many more studies doing similar kinds of research on art investment and all
those studies such as that of Mei and Moses (2002) and that of Beggs and Graddy (2008) give
different reasons and different outcomes. The only common conclusion is that investment in
art is indeed very risky business and knowledge on art market development is inquired to
make the right decisions. Information availability and knowledge of the market are probably
even more important when investing in art than in case of stock investment.
During flourishing economic periods in which the art prices rise and the art markets
grow, investment in arts has higher return rates. Knowing this, art investors rather invest in art
during a booming period than before that or after that. Research by Baumol (1986) and by
Frey and Pommerehne (1988) shows that the return rates during the booming 80’s on the art
market were higher. The annual art market trends reports of artprice.com shows the same
effect during the art market bubble of the 21st century. They have concluded that there was an
increase of investment in art in 2007 compared to the years before that (2007 Art Market
Trends, 2008).
33
3.3 General Motives for Buying Art
To make sure all motives are taken into account, some general motives for buying arts
will be addressed to in this final part of chapter three. These general motives work for all
visual art styles and are often referred to in studies and articles on art, art markets and art
auctions43. The motives not referred to in the previous part of this chapter are buying art to
enhance home decorating, buying art as a sign of status and last, but very important, buying
art for its beauty. These motives do not need a lot of explanation; still they all three will be
elaborated a little more in the next part.
3.3.1 Enhance Home Decorating
Why hang a painting on your white wall at home? Of course, just to make the white
look not that white. It is as simple as it seems. For a large part of the buyers on the art market
it is about finding a piece of art that enhance the decoration of their living room. This is the
reason that about 80% of all transactions on the secondary art market are for works sold under
the $10.000 line44.
3.3.2 Sign of Status
You could decide to hang a reproduction of a Picasso painting or a reproduction of a
Van Gogh painting on your wall. Another possibility is to buy a poster of a Dali of Gauguin
painting. Put it in a nice frame, hang it on your wall and the decoration of your living room is
finished. For many people this is more than enough; they rather have a poster on their wall of
a painting painted by some famous artist than some real art made by a not so famous artist.
Real art is expensive because of its uniqueness and cultural value; especially
something made by the most famous artist is not for sale45 for every single person. There is,
naturally, a lot of art on the market that is not that expensive and still real interesting and
beautiful. The reason to choose for real art is, to many people, the message you send out by
having real art on your walls. Owning real artworks is a sign of status. It is a way to tell other
people that you are in a good financial position and that you have a certain level of knowledge
and taste. For a lot of people it is very important that other people know your level of life and
in what box they can put you in. Buying art has for these people no other reason than buying
it as a sign of status.
3.3.3 Art for its Beauty
Most buyers on the art market, especially the private collectors, have only one reason
to make a purchase on an artwork: because of its beauty. As simple as it is: you like it or not
and for an art lover or a private collector it is only about the liking it factor. The artwork has
to do something to you, with you; it should make you even more complete than you already
43
When pricing of art or art markets are described, motives for buying art are often referred to as influential
factors on the art market.
44
According to the art market trends annual reports by artprice.com. More on the price ranges and supply and
demand is in chapter 6.
45
Not because they are not allowed to buy it, but prices of this category of art can only be paid by the wealthiest
among us.
34
are. Buying art for its beauty is probably the most easy and at the same time the most
complicated motive for buying an artwork. It is easy to say that something is beautiful, but
like the saying ‘it is easier said than done’ it is almost impossible to say what beauty really is.
Beauty is something personal influenced by time and place and impossible to measure.
35
3.4 Conclusion
When private art investors, or better: art lovers, are asked for what reason they have
decided to buy art, they would probably answer this question by saying that they bought it for
its beauty. The beauty of an artwork is in the case of this research and to the people
considered here the main motive for buying it, especially to a private art collector. Though
they are not the only players on the demand side of the art market; other motives or reasons
for buying art play a role on the art market too 46. In the introduction of this chapter two
questions were raised: (1) what are the main motives for buying art? and (2) which of these
motives could have an influence on art prices? These two questions will be answered now,
since we have more knowledge on motives for buying arts.
The most important motives, looking at the motives described in this chapter, are
uniqueness, value (aesthetic), investment and beauty. Not all these motives influence the price
in the same way and for the same amount. That the uniqueness of art is a motive for buying
art is not a very big surprise, but does it influence the price of art? In the second chapter it was
already pointed out: the uniqueness and the fact that there are no substitutes influence the
price of art. The less substitutes the higher the price, so the more substitutes the lower the
price. The aesthetic value of an artwork is an important factor to private collectors, but it is
not so important to other buyers. The aesthetic value could influence the price in general, but
not in a way the uniqueness does. The uniqueness will, in most cases, influence prices a lot,
while the aesthetic value is not that important to all potential art buyers. A part of the buyers
will not be interested in the aesthetic value of an artwork. Investment as a motive for buying
art is definitely an important motive, but it is obvious that this is not the case for all
demanders on the art market. At booming times the investment rates increase and there will
be more players on the market. More players on the market will result in increasing prices.
The question is whether investing is influencing the price or whether the price is the
influencing factor on the investment. Most probable is that investment influences the price,
simply because more investors is equal to more players and this will result in changing prices.
Buying art for its beauty is a motive very much related to the value motive. It is a motive to
the private collectors not so much influencing the price of artworks.
In conclusion, the motive influencing the price by most is the uniqueness. Uniqueness
is a factor not only named as a motive for buying art, it is also a characteristic of artworks in
general47. Of many items in the market for fine arts only one copy is produced and the larger
the market for this copy is, the more demanders, the higher the price for this item. The lack of
substitutes makes the price of a product higher, even though we have seen exceptions on the
art market48.
46
Motives could differ per demander. The main motive for a private investor who is considered to be the buyer
of art for its beauty is different than the main motive for a profit orientated collector.
47
As it is described in chapter 2.
48
An exception to this is the Giacometti statue described before.
36
4. Economic Crisis
4.1 Introduction
It is not the case that from one day to another some sort of bomb was dropped on the world
and we all got to live in a world of crisis in 2008. Over a period of a couple of years the crisis
slipped into our everyday lives starting in 2006. In the first period of the crisis, by then known
as the United States mortgage crisis, we were not expecting to be effected by it that much, but
since we know the world wide effects of the crisis we wonder what we could have done to
reduce the influence of the crisis. This is not the first worldwide financial crisis influencing
people’s everyday lives so badly49.
To understand the economic crisis of the past years one should know what an
economic crisis is, what the characteristics of an economic crisis are and what influences it
has for entrepreneurs and individuals. An economic crisis never comes in a second of time, it
is a result of multiple events on the market. An economic crisis is a shift from a cyclical boom
to a cyclical slump and this can be caused by several things. Three main reasons for a shift
like that are (1) a shift in demand and supply, (2) a lack of confidence and (3) fear (Kalse,
2008-2010, p. 1). These three reasons or causes of an economic crisis should be elaborated to
make them clearer.
Talking about a shift in demand and supply is rather vague; this could be everything
and doesn’t necessarily have to be bad. Though when the supply in general rises far above the
demand and a worldwide surplus is the result, it has very bad influence on the economy. The
second reason for a crisis has to do with confidence in all economically related instances by
the consumers. If the consumers’ confidence in financial authorities like banks decreases, the
effects can be disastrous for the economy. This is what has happened in the current crisis:
people found out that the coverage percentage of banks was doubtable and decided to get their
savings from the banks. This results in a downward spiral. The third characteristic of an
economic crisis is fear of a recession. The three characteristics never come by themselves; all
three are detectable in the case of a true economic crisis. The results of this are very serious
and differ for individuals and companies.
Individuals will suffer from a downward shift in purchasing power which will lead to
the necessity of saving on their spending. The loss of confidence in the market and in the
future will lead to more problems. Individuals realize that networking has become more and
more important when there is a lack of trust in the market and economy. People’s
expectations are that a higher power, the government and the larger companies, will solve the
crisis fast. In the case of companies the influence of a crisis threat are very serious and
influence the total financial market. Companies will immediately start lowering the
production costs, for which discharges might be necessary. Besides this, all unnecessary extra
activities of companies will be put on hold for a while and the controlling of personnel gets
49
The crisis after World War II and the crisis of the 1930s.
37
stricter. New markets are searched for in order to keep the company going and as it is for
individuals, using and expanding your network gets more and more important.
The crisis of the 1930s is known as the ‘Wall Street Crash of 1929’, or the ‘Great
Crash’ (Maury Klein, 2001). The stock market crash of the US in 1929 started in New York
and it had a worldwide effect. During the 1920s there was a period of enormous growth of
wealth and excess, so to say a booming economic period. It is known that after a booming
period a period of recession will follow. The recession period after the booming 20s was
actually a heavy recession. The rising stock values made people take on loans in order to buy
more and more stocks, the amount of loans given rose too high and a fall of value was the
result. In 1929 the real estate values declined, share prices fell by 89% and many people
ended up homeless. The ‘Great Depression’ had started, this was the biggest financial crisis of
the 20th century50.
The financial crisis of 1929 has a lot in common with today’s crisis. More on the 1929 crisis can be found in
John K. Galbraith’s book (1954).
50
38
4.2 Development of the Economic Crisis
The recent economic crisis started, just as the 1929 crisis, in the United States. This
time it was not the rising stock market and the loans given to buy stocks, but the rising
housing market was the problem. Until 2007 the house prices in the US kept on rising and this
housing price bubble burst in 2007 (Robin Blackburn, 2008). The decreasing value of houses
resulted in a refinancing problem for home owners. It resulted in lag of payments to banks and
other financial institutions for their mortgages and because of this the banks and institutions
got into trouble financially. This was not yet influencing European economy. Not much later
it resulted in higher rates for loans worldwide and the smallest financial institutions already
suffered from various problems.
The mortgage crisis, as it is still called in 2007, becomes a credit crisis at the end of
2007 when banks try to solve their financing problems by having mortgages refinanced at
other banks and institutions. This eventually leads to obscurity among companies and banks
about the question who is responsible for what money in this financial scam. Panic has started
to grow all over the world about what this crisis in the United States will lead to in other parts
of the world. Panic is about the worst thing that could happen in a period like this, because it
will stop people from spending money and have the economy going. Late 2008 problems arise
for Fanny Mae and Freddie Mac, United States’ largest mortgage institutions who guarantee
about 50% of all US mortgages. This is a turning point in the credit crisis, it is a worldwide
economic crisis influencing banks, financial institutions, insurance companies and pension
funds all over the globe. In this final stage of the crisis development everyone is influenced.
4.2.1 Mortgage Crisis in the United States
In the beginning of the 21st century the United States house prices keep on rising, also
known as the house price bubble51. The increasing values of houses lead to taking extra loans
on houses in order to have a good life. In the beginning of 2007 this booming market bursts
and refinancing is not longer possible. People get into trouble fulfilling their mortgage and
loan payments and it is unclear what the financial institutions are really doing at that time.
Many people have loans and mortgages of which the first years of payment where low, but
after one or more years it appears that many unknown costs have to be paid for. House owners
cannot fulfill these high payments with their relatively low incomes and since the value of the
house has decreased too, the problems are enormous. The interests of mortgages appear to be
much higher after a year of paying low interest and the payoff problems result in taking
people out of their houses. The mortgage owner has to sell the houses for relatively low prices
and financial gaps exist for him too. The selling of houses for lower prices is influencing the
already collapsing housing market in a negative way and results in a downward spiral. The
disaster is enormous in the United States; still in Europe there seems to be no sign of any
51
The house price bubble in the United States has reached very high levels and finally led to the crisis effecting
us all.
39
problem yet, except for very high profits for many companies, which is considered to be a
sign for the end of a booming period.
4.2.2 Credit Crisis
In the summer of 2007 the United States mortgage crisis grows into a credit crisis with a lot of
missed payment for mortgages and loans. The decrease of value of houses effects the value of
existing mortgages: they decrease in value too. This is a downward press on house prices
(Egbert Kalse, 2008-2010). The fear for extreme consequences leaded to more problems and
effects the American economy. In 2007 it came to light that over 2 million American home
owners are in a position to possibly lose their houses and probably a lot more, if there is no
change in the economic situation (John C. Hull, 2008).
Later in 2007 many banks and other financial institutions come forth with negative
announcements concerning their financial situation. Even avoiding bankruptcy is no option
anymore. This doesn’t only concerns the United States: in Europe more and more signs of a
crisis are detected too and even in Asia problems are found. Banks all over the world need
state money to keep up and at the end of 2007 a lot of personnel has been discharged and
more and more banks are government dependent. First problems at ING Bank are a fact by
then. Banks taking over mortgages from other banks and institutions selling parts of their
companies to fill up other gaps results in not knowing who is responsible for what money
anymore and the money and depths get lost in a maze of banks and financial institutions.
Since the summer of 2008 the panic has started to find its way in the Netherlands, take
the Fortis and ABN Amro problems as an example52. The European economy is showing all
kinds of effects of the economic crisis and one of the effects is fear amongst investors,
individuals and companies. There is a decline of consumers’ trust 53 and a decline of
producers’ trust54. It effects individuals especially on the loan and housing market since the
value of houses declines and loans get more and expensive. The Euro has got very expensive
in comparison to the Dollar55 and this is very bad for exporting companies and so for the
entire economy. The whole economic is concerned because of the so called ‘contamination
effect’56.
4.2.3 Problems Fanny Mae & Freddy Mac
When the two largest mortgagors of the United States, Fanny Mae and Freddie Mac, are
having problems, serious panic threatens to break out. They own about 50% of all US
52
More on what has happened with Fortis and ABN Amro in 2008 can be read in the Fortis press conference of
September 29, 2008.
53
Consumers’ trust gives information on trust and expectations of consumers concerning the development of the
economy of a certain country. It especially concerns the demand side.
54
Producers’ trust indicates the short term expected development of industrial products, based on trust and
expectations of producers. This mainly concerns the supply side.
55
When the Euro is more expensive than the Dollar, export to the Dollar paying countries will decrease since
products will be more expensive in that case (Egbert Kalse, 2008-2010).
56
With the ‘contamination effect’ one means that every single economic change could affect more than one
thing like a contagious virus does to people.
40
mortgages and the effect of them falling would be disastrous for all Americans and probably
for the whole world. There is no other option than the government to cover the losses and so
the American government decided to inject an amount of 200 billion Dollar in Mae and Mac
to save them from bankruptcy.
4.2.4 Worldwide Banking Problems: Economic Crisis
The global economy is in crisis even worse than the crisis of the 1930’s: over 80
countries all over the world show signs of a recession. One cannot call this a credit crisis or
financial crisis anymore, it is an economic crisis effecting everyone. All worldwide economic
trade is influenced by this crisis and bankruptcy is the result for many companies and
institutions. In a lot of companies people try to implement all kinds of strategies to try to ease
the effects of the crisis.
Governments of several countries decide to spend enormous amounts of money in
order to give the economy a boost and economization is often postponed till 2010 or later.
They all agree that stimulating the economy has better effects than not doing anything.
4.2.5 Current Situation
In 2010, in the Netherlands, the economy is slowly getting a little better and people
dare to spend a little more although the unemployment is rising57. The current problem are the
enormous depths of states all over the world. All the implemented strategies of governments
and saving plans carried out in the past few years will show consequences eventually and that
time has come. Plans of economization are being presented at the moment and these will
affect many people in the next couple of years. Governments have implemented more than
twenty different measurements for companies and individuals to keep people from having
problems, but now the financial results of all those measurements are detectable, they have
concluded that it all costs too much money to carry on like this. The actual message now is
that we have to do it on our own and therefore a lot of things will change in the following
years58.
57
CBS statistics show that the unemployment rate is still getting higher in the beginning of 2010, the total
amount of unemployed people in the Netherlands is 5.7% of the total labor force as stated in a press release by
the CBS in March 2010.
58
More on this in ‘Het Financiële Dagblad’ of July 19, 2010.
41
4.3 Expected Effects of the Crisis
The economic crisis for certain has had an influence on all segments of the market.
The secondary art market must have been under this influence too, but how and where could
that be detected? What the influence of the past couple of years’ economic situation has been
on the secondary art market is an interesting though complicated issue. The effects of the
crisis could be detected in several phenomena’s, like in supply and demand of artworks in the
secondary art market or in the prices of works of art sold in the past years. Furthermore it
could have had an influence on people’s motives for buying art. The trust on banks has
decreased, so investing in art could be a safer way of putting your money away. Expected
effects on demand will be described first; after that the focus will be on supply and price. The
expected effects on motives and for investment will be focused on after that.
4.3.1 Demand
Up until 2007 the prices and so the sales of artworks on the secondary art market
where rising and rising. The booming art market resulted in a more divided demand over a
larger group of people. The fear for the effects of the threat of a possible economic crisis
made people be more careful spending their money the way they were used to do. People
rather save than spend in an economic situation as a financial crisis. At present people’s future
perspectives are influenced by an economic crisis and especially the larger expenditures, like
cars, houses and new furniture, are put on hold.
An economic crisis most often influences the people with lower and average wages. A
lot of people with higher incomes do not suffer that much from the crisis, although their losses
are or can be high, they might still be able to continue living the way they lived their life
before the crisis. The expectation is that the demand for lower priced art decreases much more
that the demand for the top pieces, the million dollar artworks. This would make it very
interesting to see whether it is possible to detect the differences in sold artworks over the past
few years looking at different price categories.
4.3.2 Supply
An economic crisis does not only influence the individuals all over the world, it also
influences companies, enterprises and other institutions. The effect of this could be that
companies like banks decide to sell their art collections. Banks like the ING Bank and
Rabobank in the Netherlands have large art collections which are of less importance in times
of crisis. The effect of this could be an increasing supply on the secondary art market.
Bankruptcy is a common thing during an economic crisis and property sales of individuals
also could lead to a rise of supplied art.
The estimates of artworks do decrease during times of crisis, so if it is not necessary it
would be better to put the sale of your artwork on hold. There is always a market for artworks,
the uniqueness of works is a reason for this, so the supply of top works will probably not
really change. The crisis of the 1990’s shows that although the market was changing, record
42
sales still existed during that time. Another phenomenon from the 1990’s clash is very
interesting to keep in mind: artists and collectors are willing to help out during periods of
crisis, so they might be willing to put more works of art up for auction during crisis time.
4.3.3 Price
Looking at the expected effects of demand and supply one could expect influence on
price as well. The market will change and so the price of art will change. Expected is a
decreasing price index for artworks sold on the secondary art market because of less players
on the market. The price index of low priced artworks will probably decrease more than the
price index of artworks sold for a price above one million Dollar.
In the previous chapters was concluded that the price of an artwork is influenced by
several factors: (1) on the level of the artwork, (2) on the level of the artist and (3) on the level
of the selling location. Especially the third one plays a role during a period of impact of an
economic crisis. All transactions on secondary art will in a way influence each other and the
price index of art will decrease during a depression. The selling location, in this case auctions
houses, does influence the price of what is being sold, because it is influenced by the supply
and demand of the auction house.
4.3.4 Investment
The investment in art and its return rate is studied by many. Especially the studies by
Baumol (1986) and Frey and Pommerehne (1988) using the Reitlinger research of 1961 give a
lot of information concerning the investment return rates in the art market. These studies are
the first on the subject, but definitely not the least interesting. They have shown us that the
return rates of art are on average not very high, respectively 0,55% and 1,5-1,6% and very
risky, they fluctuate between -19% to +27% during a time period of more than 300 years59.
The studies also show that investment in art is related to the bubbles and clashes on the art
market.
During booming times on the secondary art market it turns out that more investors
enter the market and more investments on the secondary art market are made since the
investors have lost confidence in the stock market (artprice.com). When the art market shows
a downturn, the investment return rates decrease and we might expect less investment in art.
Investors are known for wanting to have all possible knowledge on the market they
invest in and so is to be expected that they are well informed on changing figures on the art
market. Therefore it is not expected that they will continue to invest in a market not doing
very well and so if the economic crisis negatively influences the secondary art market, we
may expect lower investment rates at this market.
59
There is more on art investment and return rates in the chapters 2 and 3.
43
4.4 Conclusion
In the beginning of this chapter it was stated that it is essential to know what an
economic crisis is about in order to understand what the possible effects could be. An
economic crisis is a shift from a cyclical boom to a cyclical slump and this can be caused by
several things. Three main reasons for a shift like that are (1) a shift in demand and supply,
(2) a lack of confidence and (3) fear. Knowing this, some evidence from the past was
presented to strengthen this and giving extra insights in the movement of a crisis.
After a short introduction, the development of the current crisis was elaborated period
by period until the present day situation. Interesting is to see how crisis has developed over
the past years and how a crisis on the United States housing market was the inducement for a
worldwide economic crisis. Step by step recovery is on its way, but it can still take years
before the entire economy is back to normal. The question is whether this is also the case on
the secondary art market.
The overview of the development of the economic crisis gave the necessary
information to make assumptions on what the influence of the crisis could be on the
secondary art market. We have looked at some factors that could be influenced by the crisis in
order to make comparisons between the general economic development and the findings on
the secondary art market. The factors discussed were demand, supply, price and investment.
Expected is that the demand for art will probably decrease because of the economic
crisis, though in the beginning of a crisis people might lose confidence in the banks and
decide to spend on art. The supply of art will probably not change too much. There are
reasons for not putting your works for sale, but since there is a reserve price for artworks sold
on the secondary art market, sellers have no fear of losing a lot when selling an artwork.
Evidence from the 1990’s crisis and clash on the art market show that people active on the art
market are willing to help in diminishing the effects of the crisis on the secondary art market,
by putting extra items up for sale. The effects of demand and / or supply will show an effect
on the price of art.
Decrease of demand and a steady supply will result in lower art prices, but taking in
consideration the typical characteristics of the art market, this could be different for various
price levels on the secondary art market. The general price index of artworks will show a
decrease as a result of the economic crisis, but it might be different per price level, amongst
other things, because of the uniqueness of art in general and because of the aesthetic value of
art. However this aesthetic value does not play a role for investors in art.
Besides looking at demand and supply on the secondary art market in general, the
effects on investment in art are also elaborated. Evidence from the previous crisis showed that
investment in art has high return rates during a booming period and it showed that the art
market reacts later to the crisis. Effects of an economic crisis slowly enters the art market and
it is possible that effects are not even detected in the first years of the crisis. When investors
44
lose confidence in the stock and loan market, they could decide to shift to the art market.
Knowing this, the investment in art will increase during the first years of an economic crisis.
As soon as the price index of art is going down, investment in art will go down, since the
return rates will decrease because of the decreasing art prices.
In conclusion: the economic crisis affects the whole world, though is expected that the
effect on the art market is coming later. Reasons, for the effect coming later on the secondary
art market, should or could be found in the changing demand, supply, price and investment
rates on the secondary art market. Evidence from the past will help in understanding the
effects in present and future.
45
5. Methodology
5.1 Aims and objectives
The aim of this research is to find out to what extent it is possible to determine the
results of the economic crisis in the visual arts looking at the prices of art sold at auction
houses in the past years. The goal is to find evidence of the economic crisis in the arts. To find
this evidence, to answer the main questions and to reach the goal is a matter of doing two
types of research: qualitative and quantitative research. The research is partly a literature
study on the secondary art market, price determinants and on motives for buying arts, and the
other part of the research will be a data analysis on all kinds of figures from the secondary art
market. The data considers all art sold and put up for sale at auction houses over the past five
years.
Basically the aim of this research is to find out what the influence of the economic crisis in
the visual arts sector is.
The objectives are gaining knowledge on determinants for art prices looking at
previous studies and on motives for contributing in the arts by doing research on the motives
for buying artworks. The second objective of this thesis is gaining knowledge on the influence
of a worldwide economic crisis on the secondary art market. This will be gained from
artprices.com data. Artprice.com is a database for art market information founded by Thierry
Ehrmann in 1987. It is the world leader in art market information containing 27 million
auction prices and indices. It combines the information from 3600 auction houses all over the
world and it has records of 290.000 fine art auctions. There is no other place where so much
auction house data is combined.
46
5.2 Research question and central questions
The research question of this thesis is, as shown in the introduction: ‘What is the
influence of the recent economic crisis on the fine arts sold and put up for sale at auction
houses worldwide in terms of supply and demand, price and investment?’.
First every part of the question, starting with the economic crisis, will be elaborated
briefly. The crisis has an influence on every single sector since it started. Therefore it will
probably have an influence on arts and culture due to the fact that governments will have to
economize and might cut subsidies in order to do so. If people’s purchasing power decreases,
people are possibly less willing to buy luxury goods and arts are considered to be luxury
goods, so people will probably buy less art. Therefore the question is what the influence of the
crisis is on artworks sold at auction houses? The second part of the question, focusing on the
sold artworks and artworks put up for sale, has to do with the fact that about one third of all
art put up for sale at auction houses is not sold (artprice.com); therefore it is not possible to
leave this category out. The third part of the research question considers the aspect of auction
houses worldwide, which seems a large field. The roots of the present economic crisis are in
the United States and effects the global economy, therefore it is interesting to see what the
effect of this global crisis is on the global auction houses market. For this research the auction
houses are considered to be the secondary art market. The final part of the question is about
where on the auction house market the changes are expected to be seen.
In order to answer the research question some central questions are necessary. Some of
these questions have been answered in the previous chapters of this thesis and some will be
answered using the results of the data research.
The central questions are:
1. What are the main price determinants of artworks sold on the secondary art market?
2. What price determinant had the greatest influence on the prices of artworks sold on
the secondary art market?
3 What are the main motives for buying art?
4. What motive influences the price of art sold on the secondary art market most?
5. What is the development of the global sales at auction houses over the past 5 years?
6. What is the development of the price index on the secondary art market?
7. What is the development of the sales at the highest price range?
8. What is the development of the market share of different countries on the secondary
art market?
Questions 1 and 2 have been answered in chapter two and questions 3 and 4 have been
answered in chapter three. In chapter six the questions 5 to 8 will be answered and the
research question is answered in the conclusion, chapter 7.
47
5.3 Research Strategies, Designs and Methods
This thesis is divided into two parts, an exploring part and an explanatory part. The
first part of the research will be on the price determinants and on the motives for buying art.
This is a qualitative research part in which several research studies are compared in a
literature study. A literature study is the best way to find useful insights on this matter. In
qualitative research studying literature is the first step to get to the data one needs for his own
research. Since subjects as determinants for pricing and motives for buying are not really
tangible; it is necessary to choose a research method that fits in that (Hart, Boeije and Hox,
2005). Central in qualitative research is describing the situation or subject of the research, so
the reader understands what is going on and is able to make presumption of the situation or
subject (Hart, Boeije and Hox, 2005 p. 113). Since existing data is used for further research,
this is a secondary research.
Chapters 2 to 4 are based on literature and studies done before: first literature and
studies concerning the subject was gathered and read. Second a division was made between
useful not useful information. Next, the articles and studies were divided by item and topic
and used for the chapters 2 to 4. The literature was studied and combined into the different
chapters.
The second part of this research will be a quantitative research on the changing art
market using existing data. It is a longitudinal research, because data of several years will
compared to be able to find trends over the years. The goal of this research is to see what
happens over a period of time on the art market, looking at specific data from that market. The
data used is existing data, so it is secondary research. Since the same specific data is used of
the different time periods, the only method useful is longitudinal research (Hart, Boeije and
Hox, 2005).
The data will be taken from six annual reports of artprice.com and put together in an
excel file in order make comparisons. The data focuses on the fine art auction sales of 20042010 in terms of total turnovers, prices, bought-in rates, record sales, market shares and
different ends of the market. The existing data will be transformed into index numbers in
order to compare them. Because of the transformation into index numbers it is justified to
compare the data. All data will be put in different charts and graphs, so trends can be detected
and defined. The method used for the second part of this thesis is secondary analysis of
existing data. The data used was gathered by Artprice, an organization focusing on gathering
information on the art market. They collect all data from all transactions at auction houses and
therefore their collected data is liable to use.
48
6. Results
6.1 Introduction
Using the annual reports of artprice.com reflecting on the art market trends per year
will give a better insight on the changing art market during the economic crisis of the 21 st
century. Several datasets are produced using the different reports of artprice.com to compare
the changes that have occurred over the past years. First an overview will be given on the
separate years, in order to make the data presented later easier to understand.
In chapter 6.2 the basic ins and outs of each year will be presented that could give us
an idea of what happened on the secondary art market each year. As has been elaborated
before60, the art market was growing really fast in the first years of the 21st century.
Chapter 6.3 will show several charts made, using the data from the past six annual
reports of artprice.com. The year 2004 is used as a base year and in case indexes are used,
2004 is put on 100. The data in the charts and explained in the chapter is collected from the
different reports and put together to show whether there are trends detectable that could have
a relation with the economic crisis.
60
In chapter 2 the latest art market boom has already been presented.
49
6.2 Overview Secondary Art Market 2005 – 2010
Before focusing on all kinds of charts and data it would be interesting to see what has
happened on the secondary art market over the past six years looking at it year by year using
the information available at that time. This means that at the time the overview of 2005 was
made, the information on 2006 was not available yet.
6.2.1 The Secondary Art Market of 2005
In 2005 everyone was overwhelmed by all the record breaking data considering the
secondary art market and the annual report 2005 of artprice.com presented in 2006 shows this.
The total turnover at fine art auctions worldwide has passed the $4 billion, even though the
amount of lots sold was approximately the same as in 2004. The price index for art sold on the
secondary art market has risen in comparison to 2004. The New York market was responsible
for 55% of all over $1 million sales.
The lower segment of the market, where artworks of under $10.000 are sold is good
for 83% of the total market, but this end of the market is not as speculative as the higher
segment. Especially the lowest segment, the under $2.000 sold artwork, shows that there is an
increasing price index of only 5% and above the $2.000 line the price index increased by
23.6%. The increasing prices are by far best seen at the contemporary art market and in the
photography segment. These are the most popular categories of 2005.
The record sale for the artwork was $29.1 million at Sotheby’s in London. This was
the hammer price for the work ‘Venice, the Grand Canal, looking North-East from Palazzo
Balbi’ by Antonio Canal Canaletto (1730).
Source: Lib-art.com
50
6.2.2 The Secondary Art Market of 2006
The figures of the 2006 secondary art market show, at that time, the highest results
ever seen on the art market61. The boom of art prices in 2006 is proven by the total revenue of
the fine art auction sales turnover of $6.4 billion in comparison to $4.2 billion in 2005. The
number of sales is lower in 2006, so the price of art has generally increased. The top market is
much more dynamic than the market for the lower priced art.
The name of the artist in case of the lower priced62 works of art appears to be very
important and this says something about the future profitability of the artwork. The lower
priced artworks are the minor works by well established artists and the artworks of the less
well known artists. Also reproductions of artworks are in this category and so uniqueness is
not always an argument in this segment of the market. The prices of the artworks sold above
the $10.000 line have risen a lot faster, but the risk is also higher in this segment of the art
market.
The record sale of 2006 is a painting by Pablo Picasso painted in 1961. It is a portrait
of his muse Dora Maar, named ‘Dora Maar au Chat’ and it was sold at Sotheby’s New York
for the amount of $85 million. Picasso is the 2006 number one selling artist with a total
turnover of $339.2 million.
Source: artnet.com
61
The results from the 2006 annual report of artprice.com show this, not yet knowing what is coming in 2007.
They speak of great times for the art market, not knowing about the upcoming economic crisis.
62
The lower priced artworks are all works sold for less than $10.000.
51
6.2.3 The Secondary Art Market of 2007
This year is the seventh year on row that the prices on the secondary art market are
rising. Many new players have entered the art market over the past couple of years and in
2007 it appears that investors are more interested in investing art instead of in stock markets.
The art market bubble has reached its peak in 2007, the total turnover of fine art at auction
houses worldwide has reached the highest level ever of $9.2 billion. Also the amount of sales
over $1 million has reached the highest level ever.
The high level of $1 million and higher sales results in a supply boost of artworks
which had been put up for sale a couple of years before, but not sold at that time. People want
to try it again at a time of a good market and good sales perspectives. Also in the lower
segment of the market several peaks are detected. The ceiling prices look very promising; the
economic outlook is not. This is something taken into account on the secondary art market.
The unsure economic outlook resulted in the idea of artprice.com to create an art market
confidence index. This indicator tells us the confidence people from all over the world have in
the art market.
The sale record of 2007 was for an artwork by Mark Rothko; it was not only a year’s
record, but also a record for Rothko himself. His ‘White Center’, painted in 1950, was
hammered down for an amount of $65 million at Sotheby’s.
Source: artinfo.com
52
6.2.4 The Secondary Art Market of 2008
For seven full years the art market kept growing, the prices kept rising and the total
turnover even reached the $9 billion level. The turning point is 2008, the year that started
well, but ended not so beautifully. In the first quarter of 2008 the art prices increased by 7.5%
in comparison to the fourth quarter of 2007. The supply of art, the number of lots put up for
auction, has increased with 20% in 2008 in comparison to 2007. The negative effect of this is
the high bought-in rate of 2008. The total turnover of the 2008 was about one billion Dollar
lower than the turnover of 2007, actually $8.3 billion. The number of sales in 2008 above the
$1 million line was lower than in 2007, respectively 1.090 and 1.254 times.
To have a better view on what happened during 2008, some data will follow. The
turnover of the first half of 2008 was $5.5 billion and for the second half of 2008 $2.8 billion.
The amount of sold lots of everything put up for auction above the $1 million line in the first
half year of 2008 was 80%, this was only 55% in the second half of the year. The month
October is considered to be the ‘black month’ for the art market. The bought-in rate reached a
level 43.6% and the artprice.com art market confidence rate shows an enormous downfall of
26.6%.
The record sale of 2008 is $77 million; it is of an artwork made by Francis Bacon:
‘Triptych’. The artwork was made in 1976 and sold at Sotheby’s New York on the 14th of
May.
Source: coosacreek.org
6.2.5 The Secondary Art Market of 2009
“In 2009, the global economy experienced its worst crisis since WWII with more than
80 countries in recession until the latter half of the year. At the same time, the global art
market suffered the deflation of an unprecedented speculative bubble.” (Artprice, 2010)
All kinds of strategies are implemented at auction houses in the hope of avoiding a
complete meltdown of the art market. There was no complete meltdown in 2009, but a lot has
53
changed on the secondary art market. Shifts between different countries are a fact63 and the
amount of sales above $1 million decreased with 50% more in comparison to 2008. The total
turnover of 2009 is $4.6 billion and that is $3.7 billion below the total turnover of 2008.
The supply of artworks of prices between $10.000 and $100.000 has decreased, while
the amount of artworks sold under the $5.000 has increased in 2009 in comparison to 2007.
The crisis of the 1990’s showed a purchase freeze at the high end of the market 64. The 2009
sales, on average, attracted less media attention and the most auction sales resulted with lower
outcomes as estimated. The autumn of 2009 shows a little change, it seems that there are signs
of recovery detected on the secondary art market, even though they are very small. The signs
of recovery make the artprice.com’s art market confidence rate rising a little. Over 2009 the
rate has risen about 15 points.
The record sale of 2009 was $43 million for ‘Head of a Muse’ drawn by Raphaël in
1511, which is the record sale for an Old Master piece. It was the highest price ever paid for
an Old Master worldwide. The artwork was sold at Christie’s in London for £26 million.
Source: digitaljournal.com
63
In the next part of chapter 6 this will be elaborated using all data from the different players on the secondary
art market.
64
With high end of the market one talks about the sales above $1 million.
54
6.2.6 The Secondary Art Market of 2010
The recovery of the global art market is a fact; looking at the art market trends of 2010
you see stabilization of the global art price index. The index has risen by less than 0,5% in
comparison to 2009. Despite the stabilization of the index; the total turnover of 2010 has more
than doubled in comparison to 2009. The total global turnover of fine arts was 9,34 billion
Dollar in 2010. This is based on the information of 5,4 million auction results from 3600
auction houses all over the world (Artprice, 2011).
There are two major trends in 2010 which have influenced the results of 2010. First
the enormous growth of the Chinese art market, even becoming the number one; taking over
the lead position over from the United States and the UK. Over the past decade, France is the
biggest loser on the art market. Secondly, the emerging recovery of the art market is a
characteristic of the 2010 art market change. The recovery of the art market after the 1991
market meltdown had taken over 4 years, while the recovery of the recent art market
meltdown only took 18 months; starting halfway 2009.
Why is France the big loser of the past decade? Looking at the figures of the past five
years, especially looking at the growth of the French art market in 2009, one would not say
that France is a loser at all. Although the results of 2010 say otherwise and this is considered
to be the result of the lack of modernization of the French art market. The percentage of the
art auction market sales France was responsible for in 2009 was 13,9 in comparison to 5,1%
in 2010. Revenue was higher in 2010, but that is because of the height of the total global
revenue of 2010 in comparison to 2009.
The 2010 record sale was $95 million, this amount was paid at an auction at Christie’s
New York on May 4, 2010. The painting bought for this $95 million was ‘Nude, Green
Leaves and Bust’; a 1932 painting by Pablo Picasso.
Source: arts-showcase.com
55
6.3 Comparisons of Data 2004-2010
Using the annual art market trend reports of artprice.com, trends are searched for over
the past seven years 65 to make a comparison between the secondary art market and the
economic crisis. The roots of the economic crisis are found in the United States in 2006 and
whether or not this can be seen in the trends on the secondary art market is an interesting
question. Data from the different years are combined in an Excel document in order to make
charts and graphs that will confirm the trends, or not. Useful information that could show
relations between the crisis and the development of the art market is combined in the Excel
file and discussed in this chapter. Every chart will be briefly discussed and in short
conclusions will drawn from the charts.
6.3.1 Global Art Price Index
The price index of art tells something about the general price change of all sold
artworks worldwide on the auction market. Differences among different price levels cannot be
read from this index, but since the price index is calculated using all auction sales of each
year, it is a reliable source to search for a trend.
Global Art Price Index [2004 = 100]
Global art price index [2004 = 100]
163.4
138.4
137.2
136.6
125.7
110.4
100
2004
2005
2006
2007
2008
2009
2010
Figure 1.
The chart above shows the global art price index of the past five years taken 2004 as a
starting point. With 2004 set at 100 points the price index change of the past years is evident.
The art prices increased over three years with 63,4% between 2004 and 2007. The prices
65
Seven years, because 2004 is used as the base year for the indices; in order to be able to see trends starting in
2005.
56
increased most in 2006 with an amount of 25,4 percent. The increase in 2007, in comparison
to 2006, was 18%.
The change of the price index of art is in line with the general trend the secondary art
market shows over the past few years. Besides that it is also in line with the effects of the
economic crisis. The crisis started in 2007, while the art market was still booming, but the
crash on the art market of the 1990’s was also a little after the economic crisis, so there is a
resemblance between the two periods.
Striking is that the price index of 2009 has risen a little in comparison to 2008 and the
index of 2010 barely in comparison to 2009. Whether this is the start of further rising or an
exception is the remaining question. Further research in the future will answer this. Looking
at the price index of art development on the secondary art market, one could conclude that the
worst period was in 2008, while the economic crisis has started in 2006. We should keep in
mind that the price index alone will give too little information to be able to conclude anything
yet.
6.3.2 Global Turnover
The global turnover of fine art is the total amount of Dollars exchanged on the
secondary art market. It is the total of Dollars paid for all artworks sold on the fine art auction
market worldwide per year.
Fine Art Auctions Global Turnover
Fine Art Auctions Global Turnover [billion $]
9.4
9.2
8.3
6.4
4.6
4.2
3.6
2004
2005
2006
2007
2008
2009
2010
Figure 2.
Looking at the chart above shows that there is no doubt about the trend one can see in
these numbers. The data shows that the amount of Dollars spent on fine arts on the secondary
art market has reached a peak in 2007 and started to fall after that. The development of the
57
turnover is that from 2004 to 2007 the yearly increase grew each year. The increase of 2004 to
2005 was only $0.6 billion, while this was for 2005 to 2006 $2.2 billion and for 2006 to 2007
$2.8 billion. The fall of the turnover wasn’t that large from 2007 to 2008, but from 2008 to
2009 the fall was $3.7 billion. Striking is the rise in 2010 in comparison to 2009, the total
global revenue more than doubled to an amount of $9.4 billion.
Information on 2011 and further will tell us how the global turnover will develop and
whether or not it will reach the amount of $10 billion. Though after 2010 the turnover of fine
art at auction houses will probably stagnate and stabilize since another increase of $4.8 billion
is almost impossible.
The trend is also very clear when looking at the turnover index, instead of only
looking at the rates. The fine art auction global turnover index rates show the development of
the total global turnover of fine art at auction houses in percentages using 2004 as the starting
year. Therefore the year 2004 is put on 100.
Fine Art Auctions Global Turnover Index
[2004 = 100]
Fine Art Auctions Global Turnover Index [2004 = 100]
261.1
255.6
230.6
177.8
2004
127.8
115.3
100
2005
2006
2007
2008
2009
2010
Figure 3.
The chart shows a slight rise of the turnover in 2005, but after that it rises really fast
until the peak of 2007, at which the turnover is 155,6% higher than the turnover of 2004. The
decrease of the turnover in 2008 compared to 2007 is about 10%, while the decrease of the
turnover of 2009 compared to 2007 is 50% and compared to 2008 45%. One could conclude
this by saying that the real downfall of the secondary art market, only looking at turnover
rates, is in 2009, three years after the start of the crisis. Immediately after that a fast comeback
is detected in 2010!
58
6.3.3 Comparison Global Price Index and Global Turnover Index
Looking at the price index alone 2008 was the worst year, while only looking at the
turnover index shows that 2009 was the worst year for the secondary art market. Comparing
those two is the next best step to take.
Global Price Index and Global Turnover Index
2004-2010
Global art price index [2004 = 100]
Fine Art Auctions Global Turnover Index [2004 = 100]
261.1
255.6
230.6
177.8
115.3
138.4
137.2
136.6
127.8
125.7
100
110.4
100
2004
163.4
2005
2006
2007
2008
2009
2010
Figure 4.
Looking at the chart above, we can see where the difference starts. Until 2007, which
is according to the annual trend report of artprice.com the peaking year of the art market
boom, the development of both indexes are more or less the same. Although the growth of the
global turnover was much larger. After 2007 both indexes show a period of decrease, which is
greater for the price index, but the price index is increasing again after that in 2009. The
decrease of the turnover is worse in 2009 compared to 2008.
Using the information from the chart, one could conclude from the data that the lower
price index and the lower turnover in 2008 is a result of the economic crisis. When the prices
decrease and the turnover decreases it could be that the supply is still high, probably some
lower than it was before 2008, since the decrease of the turnover is much bigger than the
decrease of the price. From the information of 2009, the year at which the turnover decreased
by about 45% compared to the previous year, one can conclude that the supply of art has
decreased. The general price index rose in 2009 compared to 2008, so more was paid per item
sold.
The biggest difference is seen in 2010. The revenue index has increased enormously
compared to 2009, while the price index only shows a slight difference between 2009 and
59
2010. This means that the amount of lots sold in 2010 must have been a lot higher than in
2009, because the prices of artworks in general have barely changed.
6.3.4 Bought-in Rate
The bought-in rate is the percentage of artworks that were not sold after being put up
for auction of all lots put up for auction. In case of ten works put up for auction and three not
sold, the bough-in rate is 30%. The reason for a work of art not being sold at an auction could
be that the hammer price was lower than the reserve price for this artwork or there was not
interest for the work. On the secondary art market a general bought-in rate is about 30% to
35% on average.
Bought-in Rate
Bought-in Rate [%]
38.5
37.8
35.5
34
2004
34
2005
34
2006
2007
2008
2009
Figure 5.
Until 2007 the bought-in rate is on average66, as the chart shows, but after that the
percentage of unsold lots is rising and reaching a peak in 2009. The fact that the bought-in
rate keeps on rising means that the amount of sold artworks is going down. Almost four out of
ten artworks put up for auction is not sold at the reserve price level and therefore bought-in. A
high bought-in rate is considered to be a result of recession looking at evidence from the
previous art market clash in the 1990’s. Looking at the percentages of 2008 and 2009 in
comparison to 2007, the rise was larger between 2007 and 2008 than between 2008 and 2009,
so one could conclude from this that the influence of the economic crisis was worst in the
2008. There is no information available on the 2010 bought in rate.
66
According to artprice.com the average bought-in rate is somewhere around 35%.
60
6.3.5 Comparison Bought-in Rate Index and Global Price Index
Is there any similarity between the bought-in rate index and the art price index and if
so, what does it tell us? It is interesting to compare these two indices because in case of lower
prices one would expect more sales and lower bought-in rates. According to the evidence
from the separate charts the development of the bought-in rate differs from the development
of the price index. In the first place the bought-in rate should be converted into an index in
order to make the comparison. The following chart follows from that.
Global Price Index and Bought-in Rate Index
Global art price index [2004 = 100]
Bought-in Rate index [2004 = 100]
163.4
138.4
136.6
125.7
110.4
100
100
2004
2005
104.4
100
100
2006
2007
113.2
111.2
2008
2009
Figure 6.
Comparing the bought-in rate index to the price index of art sold on the secondary art
market is interesting, because it could say something about the demand and supply of
artworks. When the price index increases, the amount paid per artwork is increasing
and
an increase of the bought-in rate means that more artworks of the total amount of works put
up for sale are not sold at the reserve price and so bought-in.
In 2007 the price index has reached a very high level and the bought-in rate has barely
moved, this means that people are willing to pay a large amount of money per artwork. In
2008 the price index decreased heavily and the bought-in rate increased, this means that
people are not willing to pay much for art and many artworks do not reach the reserve price
level on the auction market. In 2009 the price index increased a little compared to 2008 and
the bought-in rate has increased as well; this means that although the price paid per artwork
rose a little, more artworks are bought-in because the reserve price was not reached. It could
be that suppliers want more, on average, for their works or it is because the amount of
supplied artworks was lower that year.
61
6.3.6 Art Sales at High End of the Art Market
When a work of art is sold at the high end of the art market, it is sold for at least $1
million. This segment of the secondary art market is small in comparison to the low end of the
art market. At the low end of the art market about 70-80% of all transactions take place while
at the high end of the art market less than 5% of all transactions takes place.
Number of Art Sales: High End of the Art
Market
Number of art sales >1 M$
1254
1090
810
393
2004
525
477
2005
2006
2007
2008
2009
Figure 7.
The million Dollar and above sales have reached a peak in 2007 of 1254, which is an
increase of over 300% compared to 2004. There are multiple reasons for this growth: the
rising price index for art, the investment theory and the growing supply.
First, when the prices of art rise, a larger amount of artworks reach that price of 1M$
and as long as there is a market for these works, more is sold for this price. Secondly, when
the amount of investors increases, because of their lack of confidence in the stock market as a
result of the rumors about economic wealth in the US, the amount of high end sales will rise.
More investors are entering the art market, because of the booming art market and research
has shown that investment in art is best during the booming periods. Finally, more art is
supplied in all price segments of the secondary art market, so the supply of M$ pieces is
higher too.
The comparison between the turnover index and price index has shown that the supply
of art is very high in 2007, because the turnover index shows a much larger increase than the
price index. Using that information one could say that the supply of M$ works is high too.
62
6.3.7 Global Auction Turnover per Country
The biggest players on the secondary art market, speaking of countries, are all
responsible for a certain percentage of the global turnover. This information over the past
years will give insight on shifts on the art market which could be a result of the economic
crisis. The countries used in the chart are those who have the largest turnovers of the years
looked at.
Global Auction Turnover per Country in %
50
45
40
35
Global Turnover in %
United States
30
United Kingdom
France
China
25
Germany
Italy
20
Switzerland
Other
15
10
5
0
2004
2005
2006
2007
2008
2009
2010
Figure 8.
The chart shows that the US is the first country showing a downward development on
the art market. The turnover of the US has its peak in 2006 and from then it shows a
63
decreasing market share. It is interesting to see that the country were the economic crisis has
started and which was hit hardest, shows such a development on the art market. It is as if the
crisis immediately had is impact on the US secondary art market. In 2010 the market share of
the US increases a little in comparison to 2009, but they are still not even close to what it had
been. Besides that they have lost their leading position to China.
Secondly, it is interesting to see that the art market of a country that seems to be less
affected during the latest economic crisis, China, is showing a positive development over the
past five years on the secondary art market. A little stagnation is seen between 2007 and 2008,
but their share on the secondary art market has grown enormously in 2009 and again in 2010.
In 2010 they even managed to take over the leading position from the United States.
The downturn of the United Kingdom starts after 2008. Until 2008 their share of the
secondary art market kept growing, even reaching the same market share as the United States
in 2008. The effects of the economic crisis reached Europe later, because of its start in the
United States. Therefore it is not strange that the downturn of the UK came in 2009 and not
before that. The market share of the UK does not show recovery yet in 2010, but they are not
losing as much of their share in 2010 as in 2009.
The other European countries show a generally stable share on the art market, but this
is probably because their share is rather small. The only European country showing deviation
is France, their market share increase in 2009 was more than doubled compared to 2008. This,
apparently, was only a one-time thing; the market share of France decreased to 5.1% in 2010.
This is, according to Thierry Ehrmann, CEO and founder of Artprice, because of the lack of
development in modernization in France.
6.3.8 Total Global Turnover of Top 10 Artists
The total global turnover of the ten best selling artists per year is what these ten artists
have sold in total (in M$) over one year together. So it is an example of sales from the top end
of the secondary art market. The best selling artists top ten changes every year, but some
artists never seem to leave this top ten, like Pablo Picasso and Andy Warhol.
64
Total Revenue of Top 10 Artists
Total Revenue [M$]
2259.8
1841.3
1715.0
1308.8
662.2
2004
653.5
576.7
2005
2006
2007
2008
2009
2010
Figure 9.
The first peak of the total turnover of the top 10 artists is in 2007, at the same time as
the peak of the booming art market. The second, the highest, peak is in 2010; which is not so
strange considering that the total turnover was high as well in 2010. Translating this
information into an index would make it more interesting, because then it can be compared to
the global turnover index of the entire art market.
Global Turnover Index and Top 10 Artists Golbal Turnover index
Fine Art Auctions Global Turnover Index [2004 = 100]
Top 10 Artists Total Global Turnover Index [2004 = 100]
341.3
278.1
197.6
261.1
259.0
255.6
230.6
177.8
100
115.3
87.1
100
2004
127.8
98.7
2005
2006
2007
2008
2009
2010
Figure 10.
65
It is very striking to see that both the global turnover index of all artworks sold on the
secondary art market and the global turnover of the top ten artists show more or less the same
development. It is probably not really a surprise, although it was expected that an economic
crisis would influence the high end of the art market less since the wealthy people are
expected to experience less negative effects of an economic crisis. The highest segment,
looking at wealth, was expected to be able to keep on living their lives as before the crisis.
This chart proves otherwise.
6.3.9 Total Global Turnover of Three Top 10 Artists
There are some artists never leaving the top ten list of best selling artists. Over the past
seven years Pablo Picasso and Andy Warhol haven’t left the list and Claude Monet left the
top ten only twice: in 2006; he was on number 14 that year and in 2010; he was number 12
that year. The chart below shows the total turnover of these three artists per year.
Top 3 Selling Artists [M$]
Picasso
Warhol
Monet
422.3
361.5
339.2
319.7
313.5
262.4
236.7
241
199.4
174.7
153.2
2004
77.5
86.7
80.5
61.5
2005
164.9
121
106.8
80.4
47.2
2006
40.4
2007
2008
2009
2010
Figure 11.
Picasso has been the number one best selling artist for all years except for 2007; in that
year Warhol has his sales record. Both Picasso and Warhol peak during the art market boom,
but Monet has his peak later: in 2008 when Picasso’s and Warhol’s sales are going down
really fast. The real downfall for all three best selling artists in 2009, which confirms that the
effect of the economic crisis on the secondary art market was at most in 2009. The peaks for
these three artists do not differ much from the peaks shown by the total turnover on the
secondary art market and even show similarities with the development of the price index.
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6.4 Conclusion
Looking at the information from the artprice.com annual trend reports elaborated in
the second part of this chapter, some interesting developments of the past five years could be
useful to compare to the information from the data combined in charts in the third part of this
chapter. The annual reports of 2005, 2006 and 2007 speak of record breaking figures and
record breaking years in each of these reports. The high ceiling prices are good for the future
years and more and more investors enter the art market. The rising prices of above $10.000 in
2006 make the future of the art market look bright and the supply boost of 2007 is very good
for next years.
When we enter 2008, the first signs of the clash of the art market bubble are starting to
be visible. The first half year of 2008 is relatively calm, but this is already influenced by
people trying to keep the art market going as it goes. By implementing certain strategies,
players on the secondary art market hope to keep the economic crisis away from the
secondary art market. The real change in the development of the secondary art market came in
the second half of 2008. The total global turnover of fine art at auction houses during the first
half of 2008 was twice as high as during the second half of 2008. The year 2009 is not much
better: although many players still have confidence in the market, the decrease of the total
revenue is over $3.5 billion. Only the sales under the $5.000 seem to be unharmed by the
effects of the downturn. The second half of 2009 shows a gentle sign of recovery, but whether
this will lead to better times from that point onwards is the remaining question.
The data collected from the annual trend reports of artprice.com gives a lot of
information on the development of the secondary art market. Starting with the development of
prices on the secondary art market, the chart has shown that prices kept rising until 2007, in
2008 the prices were falling and in 2009 and 2010 there was a little increase. The global
turnover also kept rising until 2007 and after that it kept going down. The change came in
2010; the revenue grew in 2010 to more or less the same height as in 2007. To conclude this,
the supply of art was still high in 200867 and lower in 2009 and high in 2010 again. This is
also confirmed by the bought-in rate, which was on average until 2007, but shows a rise in
2008 and 2009. In conclusion one could say that the willingness to pay high prices for
artworks is very high in 2007 and declining in 2008, because the bought-in rate rises and the
price index falls.
The peak of the art market bubble was in 2007; this is confirmed by all the presented
data so far. Also the chart of the high end of the market sales, sales above one M$, confirms
this peak. The amount of artworks sold at the high end of the market increased over 300% in 4
years between 2004 and 2007, but decreases after that. The worst downturn was in 2009, as it
was for the total global turnover too. This also confirms that the secondary art market suffered
most of the effects of the economic crisis in 2009. Two other things confirming this
development of the art market is the total turnover of the ten best selling artists and the
development of the turnover of three top selling artists separately. The development of the
total global turnover of the top ten artists’ sales is in general the same as the development of
67
The supply of 2007 was very high according to the 2007 trend report of artprice.com.
67
the global turnover of all artworks sold on the secondary art market. As expected, the market
for art has grown in 2010, but no one expected this extreme recovery. The prices for art barely
changed, as you can see in the price index of 2010, but the revenue has grown enormously;
this means that more lots were sold on the art market. It is too bad that we cannot confirm this
by showing the bought in rate of 2010.
Very interesting information was the market shares of different countries on the
secondary art market. The market share of the United States had its peak in 2006 and after
that its share is falling until 2010; this year it started rising again. This is in line with the
development of the economic crisis that has started in the United States in 2006. Also striking
is the fact that the market share of China keeps growing and does not show any effect of the
economic crisis yet, in 2010 they have even become the leader on the market. The auction
market in China is showing relative growth instead of downfall as in the United States. It
looks like a shift of the art market: more art going through the China market and less going
through the art market in United States. In general economic terms China’s economy was
growing; while the economies of the United States and Europe were already affected by the
crisis. Therefore it is to my opinion not strange to see the shift on the art market to China as a
growing market. The economic crisis is affecting Europe later than in the United States and
this is confirmed by the data of the United Kingdom, showing a downfall in 2009. The only
thing unexpected is the rise of the French market share in 2009, which was a one year peak
changed into a downfall again in 2010.
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7. Conclusion
7.1 Introduction
The economic crisis has its roots in 2006 in the United States and is still affecting
many people all over the world. It seems impossible that the economic crisis hasn’t affected
the secondary art market over the past few years, but prove has to be presented to be able to
say it. This thesis is written in order to find that prove and hopefully it can be presented at the
end of this concluding chapter.
In this concluding chapter the findings of the research will be brought together and
compared in order to see whether or not the secondary art market was affected by the
economic crisis. Looking at the results presented in the preceding chapters and finally
combining these will give an answer to the main question of this research.
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7.2 The Effects of the Economic Crisis on the Secondary Art market
This is the final part of this thesis trying to combine different outcomes and see
whether or not the economic crisis affected the secondary art market. The conclusions of the
chapters 2 to 4 will first be elaborated briefly after which the conclusion of chapter 6 will be
shortly repeated. The first and second part of the conclusion of chapter 6 will be combined, so
it can be compared to the results from the conclusions of chapters 2 to 4 in the final part of
this chapter.
7.2.1 Conclusion of Chapters 2 to 4
The characteristics of art like irregularity of trade, uniqueness, information and
transaction costs and the availability of information are of large influence on the art market in
general and on the secondary art market. These influential factors have an influence on the
price of art on the secondary art market.
Price is actually where it is all about, because at the end we want to know what
influence the economic crisis has had on this price during the past couple of years.
Determinants on three levels can affect the price of art. These three levels are the level of the
artist, the level of the artwork and last but not least the level of place (selling place). The most
important determinants on the three levels influencing the price of artworks are (1) the size of
the work, (2) the reputation of the artist and (3) the return rates.
The determinant mostly influencing the price of artworks is the artist’s reputation. The
availability of information is of great importance, because that could also indirectly influence
the price of an artwork. A dealer working for a new artist will put a lot of effort in spreading
the name of the artist, because this will lead to an increase of the economic value of the
artist’s work.
The most important motives to buy an artwork are uniqueness, value (aesthetic),
investment and beauty, but the motive influencing the price by most is the uniqueness.
Uniqueness is a factor not only named as motive for buying art, it is also a characteristic of
artworks in general. Of many of the items on the market for fine arts only one copy is
produced and the larger the market for this copy is the more demanders there are for this copy
and that results in a higher price for this item. The lack of substitutes makes the price of a
product higher.
Three main reasons for a shift in economics are (1) a shift in demand and supply, (2) a
lack of confidence and (3) fear. Are these three characteristics of an economic change also
seen on the secondary art market? Some factors that could be influenced by the economic
crisis are demand, supply, price and investment.
Expected is that the demand for art will probably decrease because of the economic
crisis. The supply of art will probably not change too much since there is a reserve price for
artworks sold on the secondary art market sellers have no fear of losing a lot. Evidence from
the 1990’s crisis and clash on the art market show that people active on the art market are
70
willing to help in diminishing the effects of the crisis on the secondary art market, by putting
extra items up for sale. Decrease of demand and a steady supply will result in lower art prices,
but taking in consideration the typical characteristics of the art market, this could be different
for various price levels on the secondary art market. The general price index of artworks will
show a decrease as a result of the economic crisis, but it might be different per price level.
Evidence from the previous crisis showed that investment in art has high return rates
during a booming period and it showed that the art market reacts later to the crisis. When
investors lose confidence in the stock and loan market, they could decide to shift to the art
market. Excepting this, the investment in art will increase during the first years of the
economic crisis. As soon as the price index of art is going down, investment in art will go
down, as a result of the return rates decreasing.
7.2.2 Conclusion of Chapter 6
The secondary art market shows many records until 2007, which is likewise the year
of the peak of the bubble on the secondary art market. These records named and described in
the annual trend reports of artprice.com are illustrated by the charts developed out the data
available in these reports. The supply boost in 2007 is not shown by the data but is used to be
able to draw conclusions on the following years. All data shows peaks in 2007 and all figures
go down in 2008, except for some less important ones.
The development of prices on the secondary art market is a rise till 2007, a downfall in
2008 and a slight rise in 2009 and 2010 again. The global turnover also kept rising until 2007
and after that it kept going down, but in 2010 it rose and peaked. This means that the supply
of art was still high in 2008, lower in 2009 and high in 2010. This is confirmed by the boughtin rate, which was on average until 2007, but rising in 2008 and 2009. This means that the
willingness to pay high prices for artworks is very high in 2007 and declining in 2008. The
chart of the high end of the market sales confirms the peak of 2007. The amount of artworks
sold at the high end of the market increased over 300% in 4 years between 2004 and 2007.
The worst downturn of the high end of the market sales was in 2009, as it was for the total
global turnover. This confirms that the year the secondary art market suffered most from the
effects of the economic crisis was 2009. Two other things confirming this development of the
art market are the total turnover of the ten best selling artists and the development of the
turnover of three top selling artists separately. The development of the total global turnover of
the top ten artists’ sales is in general the same as the development of the global turnover of all
artworks sold on the secondary art market. Using the statements shown above it is clear that
all necessary information was gathered and put together to conclude that all three hypotheses
can be confirmed. One thing remaining a question is whether the results of 2010 are evidence
of a growing market or only a one time peak. It would be interesting to investigate that in the
future.
Concluding information on the market shares of different countries shows the
following: the United States market share increased until 2006 and after that there was an
enormous downfall. The market share of China is increasing overall, stable in 2008 but
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increasing fastly in 2009 and 2010. The United Kingdom shows a downfall in 2009, two years
after the downfall of the United States. Other European countries are not really affected.
72
7.3 Final Conclusion
There are certain questions that need to be answered in this final part of the
conclusion. The first considers the most important factor influencing the price of artworks,
namely the reputation of the artist. Does the reputation of the artist still influence the price of
art during an economic crisis? How can we judge this? Taking into consideration that the
price of art has fallen over all segments of the market and looking at the top selling artists, the
reputation of the artist has no influence anymore, relatively speaking of course. Still the
artwork of the well-known artist is worth a lot more than an artwork of an unknown artist, but
both prices declined during the crisis. The information available on 2009 tells that the only
segment of the market not affected is at the lowest end of the market. The problem remains
the judgment of course, since we do not exactly know what artworks were sold at the low end
of the market. The fact remains that the development on the high end of the market is more or
less equal to the development of the entire art market looking at the turnover data.
The second issue to consider are the motives for buying art. The motive ‘art is unique’
is considered to be the most influential to the price of art. The fact that there are no substitutes
will result in higher prices. Although the prices of artworks have fallen in general in 2008, it
does not say anything about whether or not the uniqueness of art still plays a role. The
evidence from the clash on the art market in the 1990’s shows that record sales are still
possible at crisis times, because for certain unique works there always is a market! For some
insight on this, it is interesting to zoom in on a very small segment of the art market: into the
revenues of the top 3 selling artists. One must understand that a focus on only this small area
of the art market does not really prove anything, but the results remain interesting for this
research.
The data from artprice.com has not shown so many exceptions on the market. Monet
has a higher turnover in 2008 than in all years before, but also ‘his’ turnover has fallen in
2009. The record sales of 2008 and 2009 are $77 million in 2008 and $43 million in 2009;
this compared to $29 million in 2005, $85 million in 2006 and $65 million in 2007 only tells
us that the record sales are unpredictable and not so much influenced by the economic crisis.
This could have something to do with the uniqueness of these artworks. There is great
demand for certain works and because of the uniqueness the supply is low and that will
automatically lead to high prices.
Some effects of the economic crisis were expected on the secondary art market. These
effects consider demand, supply, price and investment. Expected was a decrease of demand.
The results from the data comparisons show that price and turnover have decreased in 2008,
so the demand must have decreased to. The supply is probably quite stable in 2008, because
the price index decreased in 2008 and bought-in rate index shows a rise in 2008. A decline of
the price index means that the average price paid per artwork has decreased. The price
decreases when there is more or the same amount supplied and less demanded on the market.
Expected was that the price index of art would show a decrease during a crisis. This is the
case in 2008, but the price index of 2009 has shown a gentle rise again. Until the end of 2010
the price index kept rising gently, but we don’t know yet whether the rise of the price index
73
will continue in the future. Besides demand, supply and price it was expected that the
investment in art would rise during the beginning of the crisis and would decrease after that.
The artprice.com 2007 art market trend report considers the enormous increase of investors,
because of their lack of confidence in the stock market, as a reason for the high turnover and
high price index of 2007. Evidence from the previous booming period on the art market
confirms this assumption. There is no prove of investors leaving the art market in 2008 and
2009, though it would not be strange if they did, because evidence from the past shows that in
periods of a clash on the market, the return rates on investment are very low. Low return rates
make investors more careful and that could result in less investment in art.
Very interesting information presented in the charts was the market shares of various
countries on the secondary art market. The market share of the United States has its peak in
2006 and after that their share is falling. This is in line with the development of the economic
crisis that has started in the United States in 2006. Also striking is the fact that the market
share of China keeps growing and does not show any effect of the economic crisis yet. The
economic crisis is affecting Europe later and this is confirmed by the data of the United
Kingdom, showing a downfall in 2009. The economic crisis had its impact on Europe later, so
it is not strange that the United States show effects earlier.
Finally: Is the secondary art market suffering from the economic crisis? Yes, it is.
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8. Recommendations
In this chapter some recommendations for further research on this subject will be
given. Doing research makes you come up with new and other ideas the whole time.
Sometimes because you have the feeling information is missing and sometimes because it
could open other doors.
In this research the focus was especially on general economic aspects like demand and
supply, price and goods. Some characteristics of artworks were taken into consideration like
the uniqueness of artworks and the eternity of artworks , but they are much harder to interpret.
Further research could focus more on these factors and less on the economic factors.
The research has shown a lot of data until 2010 and the effects of the economic crisis
on the secondary art market are detected in 2008 and 2009. It seems as if the art market is
recovering really fast, especially looking at the results of 2010. The question is whether this
recovery is final or whether this is only a one-time thing. Therefore it would be interesting to
continue the research to see what happens in 2011 and 2012 in order to assess whether my
conclusions until 2010 hold for a longer term, but also because of the cost-cutting by
governments over the next couple of years.
When doing further research on the development of the art market it would be very
interesting taking the government into account. Especially their interferences in the art market
and the shift in that due to cost-cutting.
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9. References
9.1 Books and Articles
Abowd, J. & Ashenfelter, O. 2002. Using Price Indices and Sale Rates to Assess Short Run
Changes in the Market for Impressionist and Contemporary Paintings. Princeton:
Mimeo Economic Department, Princeton University.
Agnello, J. & Pierce, R.K. 1996. Financial Returns, Price Determinants, and Genre Effects in
American Art Investments. Journal of Cultural Economics 20, 359-383.
Alexander, Victoria D. 2006. Sociology of the Arts, Exploring Fine and Popular Art Forms.
Blackwell Publishing.
Anderson, R. 1974. Painting as an Investment. Economic Inquiry 12, 13-26.
Ashenfelter, O. & Graddy, K. 2003. Auctions and the price of art. Journal of Economic
Literature 41(3), 763-786.
Bagdadli, S. 2006.Book Review. Understanding International Art Markets and Management.
Iain Robertson. Journal of Cultural Economics 30. 237-238.
Baumol, W. 1986. Economic Issues in the Arts Unnatural Value: or Art Investment as
Floating Crap Game. The American Economic Review 72 (2), 10-14.
Beckett, J. & Rössel, J. 2003. Kunst und Preise: Reputation als Mechanismus der Reduktion
von Ungewissheit am Kunstmarkt. Leipzig: Institut für Kulturwissenschaften. Leipzig
University.
Beckmann, M. 2004. Art Auctions and Bidding Rings: Empirical Data from German Auction
Data. Journal of Cultural Economics 28, 125-141.
Beggs, A. & Graddy, K. 2008. Failure to Meet the Reserve Price: The Impact on Returns to
Art. Journal of Cultural Economics, 23 (4), 301-320.
Blackburn, R. 2008. The Subprime Mortgage Crisis. The New Left Review 50 (March –
April).
Bourdieu, P. & Darbel, A. 1990. The Love of Art. European Art Museums and Their Public.
Cambridge, New York: Polity Press, Cambridge and Oxford University
Bronger, P.P.A. 1997. ‘De vraag naar Kunst in Italië in de Renaissance als Functie van
Sociaal-maatschappelijke, institutionele en economische dynamiek’, Rotterdam:
working paper, Erasmus Universiteit Rotterdam, Faculteit Bedrijfkunde.
Bryman. A. 2008. Social Research Methods. Oxford, UK: Oxford University Press.
Buskirk, M. & Nixon, M. 1996. The Duchamp Effect. Cambridge: MIT Press (MA).
Campbell, R.A.J. 2008. Art as a Financial Investment. The Journal of Alternative Investments.
Spring 2008, 64-81.
Choi, A.S. & Papandrea, F. & Bennett, J. 2007. Assessing Cultural Values: Developing an
Attitudinal Scale. Journal of Cultural Economics 31: 311-335.
Ekelund, R.B. & Ressler, R.W. & Watson, J.K. 2000. The ‘Death Effect’ in Art Prices:
Demand-Side Exploration, Journal of Cultural Economics 24 (4), 283-300.
Fase, M.M.G. 1996. Communications – Purchase of Art: consumption and investment.
The Economist 144 (4), 649-669.
Frey, B.S. 2003. Arts and economics. Analysis & cultural policy. Berlin: Springer (2nd
Edition)
Frey, B.S. 1997. Art Markets and Economics: Introduction. Journal of Cultural Economics
76
21, 165-173.
Frey, B.S. & Pommerehne, W.W. 1988. Is Art such a Good Investment? The Public
Interest, Spring 1988, 79-86.
Galbraith, J.K. 1954. The Great Crash 1929. Boston: Houghton Miffin Harcourt.
Geursen, G. & Rentschler, R. 2003. Unraveling Cultural Value. Journal of Arts Management,
Law and Society 33 (3), 196-210.
Goetzmann, W. N. 1993. Accounting for Taste: Art and the Financial Markets Over Three
Centuries. The American Economic Review, 83 (5), 1370-1376.
Hart, H. & Boeije, H. & Hox, J. 2005. Onderzoeksmethoden. Amsterdam: Boom onderwijs.
Heilbrun, J. & Gray, C.M. 2007. Economics of Art and Culture. Cambridge, New York:
Cambridge University Press (2nd Edition, 1st Edition 2001).
Highfill, J. & O’Brien, K. 2007. Bidding Prices for Online Auctions: Sofa Art or Investment.
Journal of Cultural Economics 31, 279-292.
Hull, J.C. 2008. The Credit Crunch of 2007. What Went Wrong? Why? What Lessons Could
be Learned? Rothman School Research Paper.
Hutter, M. & Knebel, Chr. & Pietzner, G. & Schäfer, M. 2007. Two games in town: a
comparison of dealer and auction prices in contemporary visual arts markets. Journal
of Cultural Economics 31, 247-261.
Hutter, M. & Throsby, D. 2008. Beyond Price. Value in Culture, Economics and the Arts.
Cambridge, New York, Cambridge University Press.
Kalse, E. 26 January 2010. Kredietcrisis in vijf stappen.
http://www.nrc.nl/nieuwsthema/kredietcrisis/article1987320.ece/Kredietcrisis_in_vijf_
stappen. Retrieved 4 May 2010.
Klein, M. 2001. Rainbow’s end, The Crash of 1929. Oxford, UK. Oxford University Press.
Mei, J. & Moses, M. 2002). Art as an Investment and the Underperformance of the
Masterpieces. The American Economic Review, 92 (5), 1656-1668.
Peers, A. 1990. Disappointing Art-Auction Sales Paint Riskier Picture for Investors. Wall
Street Journal, May (10).
Peers, A. & Jeffrey, N.A. 1999. Art and Money. Wall Street Journal, November (12).
Pesando, J. E. & Shum, M. 2008. The Auction Market for Modern Prints: Confirmations,
Contradictions, and New Puzzles. Economic Inquiry 46 (2), 149-159.
PicassoMio. What is the difference between the primary and secondary art market.
(http://www.picassomio.com/art-appreciation/what-is-the-difference-between-theprimary-and-secondary-art-market.html. Retrieved 4 May 2010.
Reitlinger, G. 1961. The Economics of Taste: The Rise and Fall of the Picture Market 17601960. New York, Holt, Rinehart & Winston.
Rengers M. & Velthuis, O. 2002. Determinants of Prices for Contemporary Art in Dutch
Galleries, 1992-1998. Journal of Cultural Economics 26, 1-28.
Rush, R. H. 1961. Art as an investment, How to buy and sell works of art for profit and
pleasure-an analysis of the art market and collector’s guide. USA: Prentice-Hall Inc.,
Engelwood Cliffs, N.J.
Schneider, F. & Pommerehne, W.W. 1983. Analyzing the Market of Works of Contemporary
Fine Arts: an Exploratory Study. Journal of Cultural Economics 7 (2), 41-67.
Schönfelf, S. & Reinstaller, A. 2007. The effect of gallery and artist reputation on prices the
primary market for art: a note. Journal of Cultural Economics 31, 143-153.
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Schulze, G.G. 1999. International Trade in Art. Journal of Cultural Economics 23, 109-136.
Singer, L. Microeconomics of the Art Market. Journal of Cultural Economics
Singer, L. & Lynch, G. 1994. Public Choice in the Tertiary Art Market. Journal of Cultural
Economics 18, 199-216.
Stein, J.P. 1977. The Monetary Appreciation of Paintings. Journal of Political Economy 85
(5), 13-26.
Velthuis, O. 2003. Symbolic meanings of prices: Constructing the value of contemporary art
in Amsterdam and New York galleries. Theory and Society 32, 181-215.
Velthuis, O. 2007. Talking Prices: Symbolic Meanings of Prices on the Art Market for
Contemporary Art. Princeton: Princeton University Press.
Velthuis, O. 2008. Book Review: Micheal Hutter and David Throsby (eds): Beyond Price.
Value in Culture, Economics and the Arts. Journal of Cultural Economics 32, 321324.
Wagenführ, H. 1965. Kunst als Kapitalanlage. Stuttgard: Forkel.
Walter, I.F. 2000. Pablo Picasso, 1881-1973: Genius of the Century. New York: Taschen
America (2nd Edition).
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9.2 Websites
http://www.artinfo.com
http://www.artintime.com
http://www.artmarketinsight.com
http://www.artprice.com
http://www.cbs.nl
http://www.cultuur.nl
http://www.economische-begrippen.nl
http://www.economisch-woordenboek.nl
http://www.nrc.nl
http://www.wikipedia.com
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9.3 Internet sources
http://www.artintime.com/opinions-2.htm (April 2, 2010)
http://www.articlesbase.com/art-articles/people-buy-art-for-many-reasons-178486.html
#ixzz0mwrQYUG0 (April 2, 2010)
http://www.artintime.com/opinions-2.htm (April 2, 2010)
http://www.creativemap.nl/2010/02/de-giacometti-hype/ (April 2, 2010)
http://www.cultuur.nl/adviezen_subsidieplan_0912_vervolg_v2.php?id=22&deel=12&hfdst
=129 (September 14, 2010)
http://www.cbs.nl/nl-NL/menu/themas/arbeid-sociale-zekerheid/publicaties/artikelen/
archief/2010/2010-019-pb.htm (September 14, 2010)
http://www.lib-art.com/imgpainting/5/4/7845-venice-the-grand-canal-looking-no-canaletto
(September 23, 2010)
http://images.artnet.com/images_US/magazine/news/waltzer/artmarketwatch5-4-2.jpg
(September 23, 2010)
http://coosacreek.org/mambo/wp-content/uploads/2009/02/bacontriptych.jpg (September 23,
2010)
http://www.digitaljournal.com/img/8/9/9/i/5/8/3/o/Raphael.jpg (September 23, 2010)
http://www.rijksoverheid.nl/onderwerpen/kunst-en-cultuur/vraag-en-antwoord/wat-is-de-wetwerk-en-inkomen-kunstenaars-wwik.html?ns_campaign=Themacultuur_sport_en_vrije_tijd&ro_adgrp=Kunst_en_cultuur_wwik&ns_mchannel=sea&ns_sour
ce=google&ns_linkname=wwik&ns_fee=0.00 (July 8, 2011)
http://www.rijksoverheid.nl/onderwerpen/kunst-en-cultuur/nieuw-visie-opcultuurbeleid#anker-wijziging-van-het-subsidiebeleid (July 8, 2011)
http://www.cultuursubsidie.nl/subsidieverstrekkers (July 8, 2011)
http://www.arts-showcase.com/blog/picasso-nude-green-leaves-and-bust-at-tate-modernmarch-2011/ (July 9, 2011)
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10. Appendixes
There are two additional parts to this thesis: those can be used as reference if needed.
In the first part some more information on auctions is given and in de second part the excel
datasheets are presented. In addition to that, some explanation is given on how certain things
were calculated.
10.1 Auction Houses
This thesis is mainly about the sales at art auctions, therefore I consider it necessary to
put some extra information on art auctions and auction houses. This is just meant as to refer to
in case of extra information is thought to be necessary. Briefly will working of the auction
houses be elaborated in this appendix, in five paragraphs.
An auction house is a place where goods are bought and sold for a price generated
from bidding. Simply said the highest bidder buys a good for the price he bid for the good.
There are different types of auctions, which all have their own set of rules. Rules can be, for
example, about the time limit, minimum and maximum prices or the participants. Basically
there are two types of auctions. The two types of auctions are: the primary types and the
secondary types. Among the primary types of auctions is the mostly known ‘English auction’.
Other types of primary auctions are ‘Dutch auction’, the ‘sealed first price auction’ and the
‘Vickrey auction’. The type of auction used for dealing artworks is the ‘English auction’ and
therefore only that type of auction will be elaborated here.
The English auction is the most often used type of auction and is known by most
people. It is an open bidding system in which one bids higher than the previous bidder. Next
bids can be named by the bidder, the auctioneer can name the next bid or the bid can be done
over the telephone or through an internet connection. It is also possible that someone has
given the auctioneer his highest bid on front and then the auctioneer can put in this bid for the
actual bidder. The end of the auction is there when no one is prepared to go any higher on the
price. The abject will now be sold to the bidder who bid the highest price. There is, although,
one exception: when the seller has put a minimum in for the object and that minimum was not
reached during the bidding process, the object will not be sold at that time. There can also be
a minimum amount being set for the steps between two biddings, so it will continue fast
enough. Think about an object of which the price will rise until 1000 Euros bidding one Euro
a time; that will take ages! The minimum amount of bidders is, in the case of an English
auction, two.
Interesting to know is that the auctioneer is the person with the hammer. He calls the
price and sees whether or not things go right and he will make sure the item will not be sold if
the minimum price was not reached. The bidders are the potential buyers of the item, they bid
on the item until only one bidder is left; that bidder becomes the buyer. The hammer price is
the price for which the item is hammered down, the highest bid.
There are two auction houses which are presented all over the world; these two well
known auction houses are Christie’s and Sotheby’s. They are responsible for most of the
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world wide art auction sales these days. Christie’s was founded in England in the 18th century,
their first auction was in London in 1766. Sotheby’s was also founded in the UK, their first
auction was in London as well, in 1744.
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10.2 Excel Data Sheets
In this final appendix the data sheets made in Excel are presented in order to show
how the graphs presented in chapter six were put together. The sheets are presented from the
next page forward.
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