{"id":1807,"date":"2015-01-27T14:57:10","date_gmt":"2015-01-27T22:57:10","guid":{"rendered":"http:\/\/www.artsjournal.com\/worth\/?p=1807"},"modified":"2015-01-27T14:57:10","modified_gmt":"2015-01-27T22:57:10","slug":"who-bears-the-burden-of-auction-house-fees-buyers-or-sellers","status":"publish","type":"post","link":"https:\/\/www.artsjournal.com\/worth\/2015\/01\/who-bears-the-burden-of-auction-house-fees-buyers-or-sellers\/","title":{"rendered":"Who bears the burden of auction house fees, buyers or sellers?"},"content":{"rendered":"

\"beast<\/a>Blog neighbour Lee Rosenbaum writes today about increases in premiums Sotheby’s auction house, speculating that Christie’s will soon follow suit. She writes<\/a>:<\/p>\n

Here are Sotheby\u2019s new charges (with old ones in parentheses), effective Feb. 1:<\/p>\n

Buyers will be charged 25% of first $200,000 (previously $100,000) of the hammer price; 20% of amount above $200,000 to $3 million (previously above $100,000 to $2 million); 12% of excess over $3 million (previously $2 million).<\/em><\/p>\n

Let\u2019s look at a specific example of how this will work: If your winning bid on an object was $10 million, you would have previously paid $11,365,000 million, including the buyer\u2019s premium. As of next month, it will cost you $11,450,000 million.<\/p>\n

Bill Ruprecht<\/strong>, Sotheby\u2019s soon-to-depart<\/a> president and CEO, issued this statement about the hike:<\/p>\n

This will improve Sotheby\u2019s revenue, strengthen the company\u2019s profit margins, fund innovation, help us continue to make interesting and exciting investments in the business, and support our growing online and traditional engagement with clients around the world.<\/em><\/p>\n

The \u201cclients around the world\u201d who will not feel \u201csupported\u201d by this fee hike are the buyers. They may well declare: \u201cEnough is enough! It\u2019s the sellers [who, in some cases, are charged no commission and even get a cut of the buyer\u2019s premium] who should be footing more of the bill.\u201d<\/p><\/blockquote>\n

Not so fast.<\/p>\n

Auction houses take a cut from sales, meaning that buyers pay more to acquire a work than sellers receive, with the auction house taking the difference. This is similar to what happens when the government taxes a good: buyers pay a higher price than sellers receive, and the state takes the difference. It is as if a ‘wedge’ has been driven between buyers’ and sellers’ effective prices. In auction premiums, as in tax policy analysis, the interesting question is ‘who bears the burden if the size of the wedge increases?’ And the answer does not<\/em> lie in the side on whom the premium or tax is nominally<\/em> levied. The allocation of the burden is more complicated that that, because prices adjust in response to changes in premiums (or taxes).<\/p>\n

What is the evidence on who bears the burden of auction house premiums? In an economic study of the auction house price-fixing case (and in other papers as well) Orley Ashenfelter and Kathryn Graddy write<\/a>:<\/p>\n

To date, the theory upholds the initial reasoning that increased commissions\u00a0should have a minimal effect on buyers, with the incidence falling primarily on\u00a0the sellers.<\/p><\/blockquote>\n

They reason, and find evidence, that the burden of increases in buyers premiums falls upon sellers.<\/p>\n

The reasoning is this: in auctions, the winning bid pays a price equal to the reservation price (the highest total<\/em> price she is possibly willing to pay) of the second-highest bidder, plus a small increment. That reservation price does not<\/em> change with changes in buyers premiums. If, for example, the reservation price of the second-highest bidder is $11,365,000 (consisting of a ‘price’ of $10 million and a auction house premium of $1,365,000), that amount does not change with an increase in the rate of the buyers premium. In other words, it doesn’t become $11,450,000 because of some change in auction house policy. Lee Rosenbaum is assuming the winning bid remains at $10 million with the change in buyers premium, but we have no reason to think it would.<\/p>\n

The winning bids will fall with an increase in the buyers premium, and that cost is borne by sellers.<\/p>\n

Ashenfelter and Graddy:<\/p>\n

This analysis would be complete if the number of buyers and sellers in the\u00a0auction were fixed, and if sellers did not set reserve prices. However, in\u00a0practice, sellers set a secret reserve price, so that some items go unsold because\u00a0the bidding does not reach this (seller\u2019s) reserve price. To the extent that\u00a0buyers are unconstrained by the reserve price, because the item sells for a price\u00a0higher than the reserve, the analysis above is unaffected.<\/p>\n

As Ginsburgh, Legros, and Sahuguet (2004) show, for the situation where\u00a0the reserve price is binding, however, it is possible that the buyers will end up\u00a0paying a higher price because of the existence of the buyer\u2019s premium.\u00a0However, if the reserve price is not binding, and the presence of a reserve price\u00a0causes the number of bidders participating in the auction to decrease, then\u00a0prices can be pushed down. This can occur if a buyer\u2019s cost of participating is\u00a0greater than his expected surplus.<\/p>\n

Buyers who fail to purchase or participate in the auction because of the higher\u00a0commission rates are worse off. In any case, however, this is a second order effect\u00a0and any harm done to those who do not purchase is not capable of empirical\u00a0identification. Overall, Ginsburgh, Legros, and Sahuguet (2004) conclude that\u00a0ex ante, the welfare of all bidders is the same, regardless of the commission\u00a0<\/em>[emphasis mine].<\/p><\/blockquote>\n

So it is sellers<\/em> who might declare that ‘enough is enough!’<\/p>\n","protected":false},"excerpt":{"rendered":"

Blog neighbour Lee Rosenbaum writes today about increases in premiums Sotheby’s auction house, speculating that Christie’s will soon follow suit. She writes: Here are Sotheby\u2019s new charges (with old ones in parentheses), effective Feb. 1: Buyers will be charged 25% of first $200,000 (previously $100,000) of the hammer price; 20% of amount above $200,000 to […]<\/p>\n","protected":false},"author":3,"featured_media":1076,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[26],"tags":[],"class_list":{"0":"post-1807","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-issues","8":"entry"},"jetpack_publicize_connections":[],"jetpack_featured_media_url":"https:\/\/www.artsjournal.com\/worth\/wp-content\/uploads\/2014\/02\/auction.jpg","jetpack_shortlink":"https:\/\/wp.me\/p3dIW5-t9","jetpack_sharing_enabled":true,"jetpack-related-posts":[{"id":1577,"url":"https:\/\/www.artsjournal.com\/worth\/2014\/10\/art-and-the-estate-tax\/","url_meta":{"origin":1807,"position":0},"title":"Art and the estate tax (updated, again)","author":"Michael Rushton","date":"October 7, 2014","format":false,"excerpt":"The New York Times reports on the Elkins case, involving a victory for a wealthy family in a legal fight with the IRS on estate tax owing on a valuable art collection. 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One of the first things arts administration students are taught about nonprofit organizations is that by law, and by definition, nonprofits are not to distribute any net earnings to managers or shareholders, but rather any revenues over costs must\u2026","rel":"","context":"In "issues"","block_context":{"text":"issues","link":"https:\/\/www.artsjournal.com\/worth\/category\/issues\/"},"img":{"alt_text":"lots of rent to collect","src":"https:\/\/i0.wp.com\/www.artsjournal.com\/worth\/wp-content\/uploads\/2014\/04\/Saban.jpg?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":1641,"url":"https:\/\/www.artsjournal.com\/worth\/2014\/10\/what-do-college-students-in-the-arts-do-after-graduation\/","url_meta":{"origin":1807,"position":2},"title":"What do college students in the arts do after graduation? 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Or not?: The majority of arts\u2026","rel":"","context":"In "issues"","block_context":{"text":"issues","link":"https:\/\/www.artsjournal.com\/worth\/category\/issues\/"},"img":{"alt_text":"What does my future hold?","src":"https:\/\/i0.wp.com\/www.artsjournal.com\/worth\/wp-content\/uploads\/2014\/10\/art-students.jpg?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":1018,"url":"https:\/\/www.artsjournal.com\/worth\/2014\/01\/pricing-at-the-met\/","url_meta":{"origin":1807,"position":3},"title":"Pricing at the Met","author":"Michael Rushton","date":"January 29, 2014","format":false,"excerpt":"Today the Wall Street Journal and the New York Times report on statements from the Metropolitan Opera regarding recent changes in prices and box office revenues. 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