Auctions and the Price of Art

Abstract

The value of most important works of art is established by public auction, either directly, by an actual sale, or indirectly, by reference to other sales. How the auction system works is thus a critical determinant of how the public’ s preferences are translated into the evaluation of artistic work. The auction system is central in the determination of the incentives for artistic work, and the efficiency of the auction system is a key determinant of the cost of creating and distributing works of art. This paper contains a review of the burgeoning new research of the last decade that has been designed to shed light on how the art auction system actually works, what it indicates about price formation, and how well it performs. We begin our discussion in section 2 with a short description of the mechanics of the auction system and then organize the remainder of our discussion around two major topics. The first topic concerns how auction prices can be used to determine and compare overall price movements within the art market and other markets, and the second topic concerns how the auction mechanism influences prices. We