Orley Ashenfelter and Kathryn Graddy
Works of art and culture are sold by many means. These include transactions between dealers and their customers, auctions with open outcry, Internet auctions and, occasionally, sealed-bid auctions. However, the standard procedure for establishing art valuations for the most expensive works is still most commonly the English auction, where prices ascend in open bidding. This chapter describes how art auctions really work, together with the state of competition between auction houses. For expensive art, competition is dominated by the duopoly of Christie’s and Sotheby’s. The chapter proceeds to describe various interesting features of art auctions, including the declining price anomaly, whether or not auctioneers provide accurate information, and anchoring effects in art auctions. The public auction system provides a valuable method for setting and determining values; it is probable that the inability of auctioneers to capture a significant part of the benefits of the information they produce leads to less use of the auction system than is optimal for society.