[intro]Do Guarantees Distort Auctions?[/intro]
It’s no secret that the eminent art historian and International Herald Tribune journalist has, in our opinion, a very poor grasp of the basics of economics. But it would also seem that he’s deficient in his understanding of how auctions function.
There’s been a silly dispute running through the art press since Josh Baer complained about Melikian’s over-stated comments on the effects of auction house guarantees on art sales. In response, Melikian digs himself further into a position of ignorance. Part of the problem is Melikian’s impression that buyers are dupes manipulated by auction house personnel:
I simply expose the way in which the very principle on which auctions are founded is utterly distorted by “guarantees.” These ensure that the price of the goods consigned is no longer freely debated between competing bidders. Through guarantees, the price is steered to a certain level by the seller, in accordance with a contract between him and the auction house, which is kept secret. I object to the element of deception. […]
Art sellers are not the only ones who matter. Art buyers do too. Legislation is necessary to make sure that buyers are not, in effect, lied to as the auctioneer calls out bids knowing full well that he will not let the work of art go because the vendor acts as a hidden competitor through the said auctioneer, who will in any case try to call his bids up to the guaranteed level.
All auctions — with guarantees and without — steer the price to a “certain level by the seller.” That’s a reserve price. “The very principle on which auctions are founded” is limited knowledge and uncertainty. That’s how auctions work. Buyers and sellers don’t know the appropriate price until the hammer falls. Many times that appropriate price is below the reserve or even the guarantee price. Many auctions end without bidders reaching the reserve price which the bidders do not know until after the auction ends. After many of those “distorted” sales there is a negotiation between a buyer and the seller, mediated by the auction house, that results in a price below the reserve.
It should be pointed out that a dealer’s sale is equally deceptive because the buyer doesn’t know whether anyone else was — or would be — willing to pay the price quoted.
The place an auction house guarantee has an effect is with the consignor. By taking less risk, the consignor gives up the reward of a strong sale. Auction houses use their superior knowledge of the buyers to set a guarantee that will satisfy the seller but allow the auction house yield more than the standard commissions. When auction houses get the guarantees right, the disadvantaged party is the seller, not the buyer. When they get them wrong, the victim is the auction house itself. That’s one reason the houses are trying to refrain from bringing back direct guarantees in favor of finding third parties.