In conversation the other day, a colleague made the following seemingly reasonable statement about buying art: "If I love it, and I can afford it, I'll buy it". We use the phrase "seemingly reasonable" deliberately here, mainly because of the implication that somehow the price at which you buy a painting is largely irrelevant - if you love the picture and can afford it, then the price doesn't matter. We disagree, and this blog explains why.
In essence, there are two schools of thought in business. The first is that I will charge a reasonable price, which leaves me with a reasonable profit margin, and provided that I provide a good product and a good service, my business will be successful in the long term. The second school of thought is that I will charge the maximum price I think I can possibly get away with at the time, even if I know I am essentially gouging the customer.
The second model can be successful, but only in limited circumstances, and art is one of those circumstances. It occurs when you combine information asymmetry in a luxury good market, underpinned by dubious salesmanship.
Let's start with information asymmetry - this means that there is such an information gap between buyer and seller that the buyer really doesn't know what a fair price for a product is, and gives the unscrupulous the chance to take advantage of the unwary. This used to happen all the time in many different markets, but the advent of the Internet has removed many of the opportunities for such mis-pricing to occur. Think of the car market as an example. The old model of the dodgy second hand car dealer in a sheepskin has by and large disappeared, and the market has almost total transparency on pricing, meaning it is now really quite difficult to overpay for a car.
In a luxury good market, the information asymmetry is often magnified. Nobody needs a piece of art - they are inherently discretionary purchases, usually infrequent, and normally made with the heart, not the head. This means that all the careful research on pricing that we all undertake for pretty much any other purchase generally doesn't happen. There's undoubtedly a thrill from spending a relatively large amount of money on a non-essential, luxury item.
Even when you do your careful research, it's generally difficult to establish what a reasonable price should be. Accessing auction data to benchmark costs both time and money - most sites require an annual subscription, and the careful sifting through of information. Even if you have this data, each piece of art is unique, so it's hard to use auction data to work out what a reasonable price should be.
Most living artists have very limited auction history, and most galleries like to represent an artist exclusively - this means that there is often no benchmark for what a price should be. The dealer can effectively set their own price, and often will not publish that price on their website - just look at the number of "POA" on most gallery websites. Most industries go to great lengths to prevent customers having true price comparison - mobile phone contracts are the famous example, where the bewildering number of contracts and bundles available are designed specifically to make it very difficult for the customer to work out whether or not they are getting a good deal. The art market has achieved this almost by accident.
And this leads us to dubious salesmanship. Most gallerists take the view (correctly) that the large majority of customers will purchase art very infrequently, will often do so emotionally - because they have fallen in love with a painting - rather than rationally, and will rarely if ever seek to sell a painting. Therefore they will conclude (again correctly) that there is profit to be extracted from this type of customer. The most nakedly commercial galleries are located in high-footfall, high tourist, wealthy areas, where there will be lots of transient traffic of people with money, and extracting as much money from these people as possible is the business model.
All of this would be fair enough I think if it were not for the dubious salesmanship. We have no fundamental objection to a piece of art being priced at £1, £100,000 or anywhere in between, provided that the selling messages that go with it are consistent. Pretty much every dealer falls into the trap of linking the purchase with money, not just aesthetics, using tried and tested pressure selling techniques: "The artist's prices are really going up recently", "This could be a good investment", "Paintings are very tax efficient", "He was a contemporary of X, and X's prices have risen a lot", or the meaningless but effective "he's in the collection of Y" (insert the name of a famous celebrity). In the world of Northern Art, we see this most obviously with the convoluted attempts to link pretty much everything back to LS Lowry and his record auction price of more than £5 million.
All of these selling techniques link art and money and investment, and some of them are just simply not true. For example, art has no beneficial tax status whatsoever - it's subject to usual rules about capital gains tax, and has no magical properties for avoiding inheritance tax. It is also incredibly difficult for art to be an investment when you are buying at retail prices (including the gallery's profit margin), but have no means of selling in the future other than at wholesale prices - effectively, the value of your piece has to double just for you to breakeven. The franchise galleries operate at the most egregious end of this market - that will be the subject of another blog - but in an unregulated market like art, it is tempting for everyone to leave their ethics at the door when they go to work.
Does any of this matter? Perhaps not if you adopt the philosophy of caveat emptor - buyer beware. But I think it matters at a subtle level in the way not only that business is conducted, but that society is conducted. We want to feel fairly treated - this is deep within the human psyche, and when we're not so treated (even unknowingly), it chips away little by little at our foundations.
To see how this plays out when high finance, art and ethics collide, just read this interesting piece on an ongoing lawsuit: https://news.artnet.com/art-world/geneva-russian-billionaire-legal-art-advisor-1314749