A Political Economy Approach
New Horizons in Law and Economics series
Edited by Alain Marciano and Jean-Michel Josselin
Chapter 14: Old Master paintings: price formation and public policy implications
Paolo Figini and Laura Onofri 1 INTRODUCTION The puzzle of price formation in the art market, and for paintings in particular, stems from the diﬃculty of applying the Marshallian theory of value to this particular market conﬁguration. On one side, marginal utility – and thus demand factors – are not suﬃcient to deﬁne the equilibrium price of paintings; production costs, on the other side, are not able to settle any natural value underlying a painting. In the literature, two alternative positions on price determination coexist. The ﬁrst one states that ‘the demand ﬂuctuates widely, following collectors’ fads and manias and paintings’ prices are therefore inherently unpredictable’ (Baumol 1986, p. 10): no fundamental value can therefore be identiﬁed for paintings. The opposite view assumes that although a natural price linked to production costs does not exist for paintings, market forces determine prices for art objects, as for any other economic good (Frey and Pommerehne 1989). Following this second approach, the literature has recently focused on the mechanisms of price formation in the art market. The heterogeneity of works of art, the monopolistic power held by the owner of the painting, the infrequency of trading, and the existence of diﬀerent segments in the art market constitute speciﬁc and problematic issues, linked to the determination and to the measurement of prices, the research has to deal with. The ﬁrst necessary step to evaluate the proﬁtability of investment in art, as compared to other ﬁnancial assets, is to...
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