An auctioneer, of course, brings together buyers and sellers interested in transacting a good or service and lets buyers compete to buy the good (forward auction) or sellers compete to sell the good (reverse auction). The auctioneer makes money by getting a fee from either the seller and/or buyer for “making the market”. It’s these auction commission rates, their level, and where they come from, that fascinates me.
When auctioneers went online in the late 1990s (ebay and FreeMarkets for instance) they began to be called marketplaces, platforms, and other terms. (I call them “matchmakers“). In almost every case, as these matchmakers grew, their commission structures went from big and opaque to smaller and transparent. Maybe not simple, but at least transparent. Examples:
- FreeMarkets, which “invented” B2B reverse auctions in the mid-1990s was initially able to sell a bundled service plus software, and even get part of the “realized” savings in return for helping an enterprise buyer run a reverse auction, while suppliers paid nothing (directly). FreeMarkets dabbled with charging suppliers and many reverse auction providers still do, but they only get 1-5% of the value of the final price. Within 10 years, the reverse auction software was unbundled from the market-making. Both the software and the market making are now sold for a fixed, very small fee.
- eBay was always relatively transparent in its fees–being free for buyers, but taking listing fees and commissions from sellers. Over time it reduced listing fees and commissions settled on fixed fees or a few percent for expensive stuff, to 10% on the traditional collectibles and small stuff.
- Elance (a matchmaker for freelancers) originally had quite convoluted pricing. Now when you search on Elance fees, you get the following:
- The equity markets have become much more cheap and transparent, though commissions and fees here were less transparent than we thought until Michael Lewis wrote a book about the issue.
- I was surprised to learn recently that the gigantic bond market is not nearly as transparent as the equity market, though MarketAxess is trying to change that.
I could go on and on with examples of marketplaces where the fees the market-maker takes have gone from opaque to transparent (and usually down) due to the advent of the internet, search, online reviews, payment systems etc. But, there is no market that is being more unceremoniously dragged kicking and screaming into the modern age than the art market.
If you want to study “clubby” and “opaque” marketplaces, the art auction market is for you. Let’s forget for a moment about the illegal practices of price-fixing that Sotheby’s and Christie’s were convicted of in 2001. (And let’s definitely not get into the sordid details of whether the art world adequately polices it sales of Nazi-looted art.) Let’s just focus on the commission structures of this market:
Auction houses try to charge both the seller and buyer pretty nice fees:
- Buyer fees seem to range from 25% on the first perhaps $100k and decrease down to about 12% when the numbers get really big. According to Wikipedia:
Christie’s announced on 15 February 2013 that it would raise buyer’s premium effective 11 March 2013. The new premiums were 25% for the first $75,000; 20% on the next $75,001 to $1.5 million and 12% on the rest.[10]Sotheby’s followed suit on 28 February,[11] announcing raised premiums effective 15 March 2013.[12] Buyers in London, New York and France are charged 25% on the first $100,000 (£50,000; €30,000); 20% from $100,000 up to and including $2 million (£50,000 to £1,000,000; €30,000 to €1,200,000) and 12% on the remainder.[11][12] Christie’s later announced an amendment to their premium increase effective 30 September 2013. This amendment applied 25% premium up to $100,000; 20% to the amount $100,001 to $2,000,000 and 12.0% to the remainder.[13]
Funny how they still follow each other!
- Seller fees seem to range from about 9-10% down to zero. The rumors are that at the high-end seller fees are not only rarely charged any more, but that sellers of great pieces are often also able to negotiate to receive 30-50% of the buyer’s premium.
- It gets better. Auction houses or third-parties can guarantee a sale at a price that is not disclosed before the auction (though the fact that there is a guarantee is apparently voluntarily disclosed) and receive a portion of any bid above the guarantee price. And this third-party guarantor, if there is one, can bid on the item–thus trying to drive up their portion of the commission! The New York Times ran an article about this just today.
The art houses claim they are committed to transparency, but I love this quote about a Christie’s disclosure before an auction in 2013 (my emphasis added):
“Christie’s owns in whole or in part lot number 17 and Christie’s guarantee of lots 6, 12, 15, 25, 33, 34, 36, and 54 have been financed in full or in part by third parties who are bidding on these lots. The third parties, who may or may not have knowledge of the reserves [the otherwise undisclosed price below which a work cannot sell], may receive a financing fee from Christie’s, whether they are or are not successful bidders. Please also note that Christie’s has guaranteed lot 25. Christie’s has a financial interest in lots 47 and 59. And lastly, Christie’s has financial interests in lots 8, 8A [the Bacon triptych], 20, 28, 39, 40 to 44, 58 and 73″…
…whereupon the audience broke into prolonged murmuring and laughter, having never before heard such a long laundry list of caveats at a public event that, once upon a time, was designed to be a simple, level playing field where a willing buyer and willing seller could openly arrive at a price upon which both could agree.
But wait! There’s more!
Christie’s guarantees of such lots have been financed in whole or in part by third parties who may be bidding on these lots. The third parties, who may or may not have knowledge of the reserves, may receive a financing fee from Christie’s, whether or not they are the successful bidder.”
This nonsense persists, of course, because the government has better things to do than keep hedge fund moguls from screwing each other. (They are too busy working on their insider-trading scandals.) But just as in every other market, entrepreneurs are now making this market much more transparent.
The company, I am most aware of that is trying to disrupt this market is Paddle8. (Full disclosure: my niece works there, but I have no financial interest in the company.) Paddle8 is backed by some heavy-hitters: The Winklevoss brothers, artist Damien Hirst, The Mellon Family, etc. It is clearly about transparency.
- If you are a seller, the Paddle8 website clearly states: “For every consigned work sold, we charge a flat vendor’s commission of 8%, which is automatically deducted from the hammer price.”
- If you are a buyer, the Paddle8 website equally clearly states: “In Paddle8’s benefit auctions, Buyer’s Premiums are generally not charged. If they are charged, this will be clearly noted above the bid field. In Paddle8’s monthly and themed auctions, winning bidders are charged a 15% Buyer’s Premium on top of the hammer price. A summary of all charges is provided prior to confirmation of the transaction. The summary outlines the total price realized (Hammer Price + Buyer’s Premium) along with any applicable taxes.”
Those of us who studied free markets, remember that one of the underlying assumptions was the availability of perfect information and competition. Let’s hope Paddle8 can help bring this notion to the art world.
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