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,"
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
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.