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 bidders.

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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