Deciphering Auction Results

In the wake of my entry

yesterday about auction houses’ estimates and reserves, Rik Pike of Christie’s

has been very helpful in clearing a few things up for me. For one thing, there’s

no doubt that estimates refer to the hammer price, and not to the total

price paid – which is the number reported by the press and by the auction

houses themselves in the wake of the sale. "Christie’s sets pre-sale estimates

and reserves without premium, and reports on post-sale results with premium,

as this reflects the final price the buyer pays for the lot," he says.

So what would this mean, I asked, in the case of a painting like the one I

talked about yesterday? Let’s say it was actually sold at a hammer price of

$25 million, and let’s say it carried a pre-sale estimate of $28 million to

$35 million. Once you add in the auction house’s commission, the total price

paid comes to just over $28 million, which brings it into the range of the estimate.

"The standard industry practice is to consider the final price paid for

the lot as being in excess of $28 million — the actual dollars paid,"

says Pike.

In other words, "standard industry practice" essentially boosts all

bids by between 12% and 25%, bringing them that much closer to their pre-sale

estimates. The $28 million estimate on the painting gets compared to the $28

million actually paid for it, and not to the $25 million bid for it. Let’s say

you read a story,

then, saying something like this:

Sotheby’s sale totaled $269.7 million, well under its $355.6 million

low estimate.

It’s worth remembering, in that case, that the sale total includes

the auction-house commission, while the estimate excludes it. On the

other hand, it’s also worth remembering that adding up the estimates assumes

that every last painting sells, something which very rarely happens.

But what if the bidding on a painting reaches $25 million and the painting

goes unsold at that price, as happened at Sotheby’s this week? Can we assume

that the $25 million bid was real? No. Before the auction, the auctioneer will

read out a disclaimer something like this:

Bidders should note that the auctioneer may open bidding on any lot below

the reserve by placing a bid on behalf of the seller. I, as the auctioneer,

may continue to bid on behalf of the seller up to the amount of the reserve

either by placing consecutive bids or by placing bids in response to other


If the reserve was at or above $25 million, then, that bid might well be "on

behalf of the seller", or, as it’s more commonly known, "off the chandelier".

This is entirely kosher, in the world of auctions. If you’re physically in the

sale room and you’ve hung around a few art auctions, it’s often pretty obvious

which paintings got real bids below the reserve price, and which didn’t. But

it’s impossible to know for sure.

While I’m at it, I should also answer the question left by Laura, in the comments

of yesterday’s blog:

It seems unfair to me that an action house can have a reserve price and so

be protected from the downside, but have unlimited upside potential subject

to market demand. I’m curious if you have any analysis to offer of this situation.

What does it do to the art market over all? Are there any comparable situations

in the financial markets? Or is this just a mechanism of a free market in

which no seller is ever forced to sell at a lower price than he thinks his

goods are worth?

What Laura forgets here is that the auction house is not the seller of the

object: it’s only the middle-man. Unless it has offered a guarantee (which is

a whole other discussion entirely), it has no downside at all. The worst that

can happen is that the painting fails to sell and the auction house therefore

receives no commission.

But yes, in general any market price is a clearing price: it’s the

level at which both a buyer is willing to buy and at which

a seller is willing to sell. In that sense, auction prices are like any other

financial market – a market price, pretty much by definition, has to be

acceptable to both buyer and seller, otherwise there is not trade, no transaction,

no price. The function of the reserve price in an auction is to ensure that

the final price is acceptable to the seller.

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