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Entertainment and Media: Markets and Economics

The Art Market

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$135 Million

http://www.nytimes.com/2006/06/19/arts/design/19klim.html?ex=1308369600&en=37eb32381038a749&ei=5088&partner=rssnyt&emc=rss

Klimt, to Ronald Lauder

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Going Once: $43.7M

It looks like it should be worth $200, but it sold for a whopping $43.7 million. An Andy Warhol painting called "200 One Dollar Bills" fetched the megasum at Sotheby's last night. It represented an incredible profit for the seller, who purchased the silkscreen for $385,000 in 1986, according to a spokeswoman for the Upper East Side auction house. Sotheby's had estimated it would sell for $12 million.

http://www.nypost.com/p/news/local/manhattan/item_ZEdwTB6wV7tjoBRazvCIOO

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Going Twice …. $80M

Jasper Johns: 1988:$17M to 2006:$80M

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Going Three Times …

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Gone! $119.9M

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$100 Million … sort ofStephen Wynn with a Prized Possession, 2007

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An Enduring Art Mystery

Why do larger paintings command higher prices?

The Persistence of Memory. Salvador Dali, 1931

The Persistence of Econometrics. Greene, 2008

Graphics show relative sizes of the two works.

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Dali in Large and SmallHallucinogenic Torreador (1969-1970) is 9’10” wide and 13’1” tall.

The Persistence of Memory. Salvador Dali, 1931. 9” x 11”

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Monet in Large and Small

ln (SurfaceArea)

ln (

US$)

7.67.47.27.06.86.66.46.26.0

18

17

16

15

14

13

12

11

S 1.00645R-Sq 20.0%R-Sq(adj) 19.8%

Fitted Line Plotln (US$) = 2.825 + 1.725 ln (SurfaceArea)

Log of $price = a + b log surface area + e

Sale prices of 328 signed Monet paintings

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Entertainment and Media: Markets and Economics

Art as a Financial Asset

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Art Market

Market for paintings? Subjective “returns” Consumption value

Measuring the return to art Ill defined “asset” Uniqueness of valuable pieces Repeat sales of the same print after long intervals

(hundreds are recorded)

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Paintings as Risky Investments

Mean St.Dev. Inflation Interest Bond Stock

Inflation 4.2% 8.8% 1.000

B of E r. 4.7% 3.6% 0.58 1.000

UK Bond 4.8% 10.6% 0.32 0.67 1.000

UK Stock 4.9% 21.9% -0.09 0.14 0.39 1.000

Art 17.5% 52.8% 0.18 0.52 0.54 0.78

Annualized Returns 1900 – 1986

Mean Std.Dev. Correlations

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The Returns to Art, by Period

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Very Long Term Return to Art Van Gogh’s Irises

1987: $40M 1990: $53M (sort of…) Getty museum, which won’t tell how much…

Lauder’s $135M Klimt Baumol’s analysis of 640 transactions

1652-1961 Remarkably low annual return –

close to zero High variance.

Returns to art are all aesthetic

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Anti-Portfolio Theory (Pesando) Buy one masterpiece for $100,000, not ten

lesser pieces at $10,000 each. (Wisdom) Conclusions

Short run excess returns Masterpiece portfolio does not do better than the

market Many price and return anomalies

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Crapshoot Theory

Baumol: There is no equilibrium and no anchor Why are money and art correlated?

A wealth effect. An Intervening effect – the stock market An issue of causation

The greater fool theory

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A few weeks ago, a triptych portrait by the British modernist painter Francis Bacon sold for $142.4 million, a record for a work of art at auction. The next night, a silk-screen print, “Silver Car Crash (Double Disaster),” by the American pop artist Andy Warhol brought $105.4 million. And this week, “Saying Grace,” by the American illustrator Norman Rockwell, sold for $46..1 million. The art market would seem to be going through the roof. But is it?

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Mei-Moses Art Index

http://www.artasanasset.com/main/ (You need to be a member to get past the front page.)

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Mei and Moses on Art

1950- auctions, Christies and Sothebys Underperformance of masterpieces Better than fixed income securities, worse than

stocks Small variance good portfolio choice Loose ends

Winner’s curse in bids? Income effect – cyclicality of prices Euphoria effect – movement with stock market The true return – intangibles

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The Art Market vs. Stock Market

MEI MOSES VALUATION INDICES VS S&P 500

0

100

200

300

400

500

600

700

800

900

1950 1960 1970 1980 1990 2000

MASTERPIECES

MIDDLE MARKET

LOW PRICE

S&P 500

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Segments of the Art Market

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The Art Market: Mei/Moses’ Measures

MEI MOSES VALUATION INDICES VS ALL ART INDEX

0

100

200

300

400

500

600

700

800

900

1950 1960 1970 1980 1990 2000

MASTERPIECES

MIDDLE MARKET

LOW PRICE

ALL ART

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How does art attain value?

This article describes a new vault where buyers of high end art can store their assets while they wait for them to become more valuable.

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Entertainment and Media: Markets and Economics

Art Auctions and Antitrust

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Art, Auctions and Antitrust

Art Auctions Open outcry, English style (ascending) Private information only in valuation (by

nature)

High end art market dominated (90%) by Sotheby’s and Christies

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Some History NY, 1960, dominated by Parke-Bernet Competition from London by Sotheby P-B for sale in 1963, $2M. S makes a credible threat to enter, drives the price down to $1.5M

and enters Christies and Phillips enter in 1977 Christies entry did not drive down the value of Sotheby. Entry

established NY as a focal point for art sale – drove up the stock value of both companies.

S and C acted as a natural duopoly, heavy competition until 1995. Competition suddenly stopped.

1995, conspired to fix commissions.

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Art Auction Conventions

The “hammer price” Two commissions wedged between buyer and

seller: Buyer’s commission about 10% of hammer price Seller’s commission about 10% of hammer price

Seller Hammer Buyer

Commission

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Fixed Commissions

Sotheby’s essentially identical.

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The Civil Settlement About $300M for each company Some criminal penalties for some conspirators (notably Alfred

Taubman who lost a lot - $7.5M and 10 months in jail.) Most $$$ paid (inappropriately) to buyers Theory is unambiguous – buyers will just reduce their bids so

that bid+commission will not exceed their reservation price. They were not harmed.

A curious incentive – the amnesty rule. The first company to confess gets off (partly) from the criminal prosecution. (Not the civil suit.)

A curious auction: The right to represent the plaintiffs was auctioned to the firm with the highest guess as to the minimum they believed they could win for the plaintiffs. (David Boies et al.)