Pricing in Auction Markets for Collectibles: Theory and Experimental Evidence

Abstract

This study investigates the pricing of alternative assets called collectibles, which comprise artwork, wine, antiques, and other similar assets. A model of an auction market for collectibles is induced from the results of prior empirical studies. The model incorporates some key characteristics of professional and non-professional investors who attend auctions of collectibles. Some additional predictions of the model are then confirmed using data derived from an experiment involving human subjects. The experimental results indicate: 1. Art enthusiasts derive utility from both financial returns and the pleasure associated with holding collectibles; hence they are willing to pay a premium — called a pleasure premium — to own collectibles. This direct confirmation of the existence of the pleasure premium is consistent with postulates contained in prior research. 2. Heterogeneous expectations on the part of non-professionals attending auctions make it likely that at least some non-professionals overbid for collectibles, making it unlikely that professionals will purchase them. 3. Pleasure premia included in the bids of non-professionals further reduce the probability of professionals purchasing collectibles at auctions and reduce the returns that are likely to be realized by successful bidders. 4. Overbidding by non-professionals forces professionals out of the market, ensuring that investments in collectibles return less than zero net present value; the probability of this occurring escalates rapidly as the number of non-professionals attending the auction increases, reaching virtual certainty at about ten. The results are consistent with prior studies indicating that investors who hold collectibles as investments derive little in the way of return benefits.