Auctions are considered the most transparent art trade channel out there — sales are clear, prices are made public, anybody can participate… However, there are some shady practices that cast a shadow over the seemingly straightforward and fair auction process. In this article, we’ll share some light on these controversial practices that impact the sales and the prices of the auction lots.
Chandelier bidding (or phantom bidding) happens when auctioneers pretend that they saw somebody in the back place a bid, even though nobody bided on the artwork.
There are several reasons why auctioneers use chandelier bids. First, they are a great way to start an auction, as many people are reluctant to be the first ones to place a bid. Another reason is to hide the reserve (the minimal price that the seller demands for a lot). The bidding has to start somewhere. If the bidding was to start from the reserve price, then the buyers would know the exact amount that the seller is willing to settle for, which would discourage them from bidding higher.
Chandelier bids are completely legal as long as their value doesn’t exceed the reserve. Before the auction, auction houses will disclose that chandelier bids may happen, either through a disclaimer in the auction catalog or verbally at an auction.
However, many believe that chandelier bidding is just a shady way of raising the prices by artificially creating demand. Despite some attempts to ban chandelier bidding at auctions, this practice is still very legal and widely used in most auction houses.
Third-party guarantee (also known as the irrevocable bid) is a bid placed on the artwork before the actual auction.
If other bidders offer a price that’s lower than the third-party guarantee, the piece will go to the guarantor (the individual or the company that placed a guarantee). But if the artwork reaches a price higher than the guarantee, the guarantor will get a part of the „upside“ — (the difference between the hammer price and the irrevocable bid).
The third-party guarantee is the lowest amount that the seller can get for the artwork. It was invented by auction houses as a way of convincing the collectors to consign their valuable artworks for bidding, by guaranteeing potential sellers a certain price in advance. Third-party guarantees are considered a controversial practice since there’s nothing stopping the guarantor from bidding on the artwork they placed a guarantee on and subsequently raise its price.
Just like with chandelier bids, major auction houses are making the practice more transparent by announcing which works have a guarantee (eighter through an auction catalog or verbally). Whether the guarantor is also bidding on a lot is disclosed in the same way. However, the value of the guarantee and the identity of the guarantor still remain a secret. This enables guarantors to bid on the artwork, raise the price and then, when the artwork reaches the desired price, simply let another buyer purchase the lot, while keeping the percent of the „upside“ for themselves.
When the piece fails to reach the reserve price, the artwork remains unsold — or as auction professionals like to say it gets burned. Getting burned is the worst thing that can happen to an artwork, a seller and an auction house. First, getting burned can mean additional expenses for the sellers, as auction houses might ask them to cover the expenses by paying for the seller’s fee out of their own pockets. But getting burned lowers the auction house rating as well, as it indicates its poor ability to attract buyers and finalize sales.
But most importantly, failing to sell a piece at an auction can determine the future of the artwork itself. When an auction lot remains unsold, there’s a public record of the lack of interest in it, which can permanently decrease its value, due to something called „common value effect”.
The common value effect means that people take other people’s opinion into consideration when determining the value of the artwork. If nobody else wants it, then collectors naturally assume that the artwork just isn’t that valuable. A 2008 Oxford study found that pieces that were burned between sales ultimately returned 30% less money than their unburned counterparts.
Pulling the Piece out of the Auction
In order to avoid getting burned, auction houses sometimes decide to withdraw a piece from the auction before the auction starts. The artwork can be pulled from the auction for several reasons. For example, due to problems with provenance and legality or personal circumstances.
But most often artworks get pulled out of the auction due to the lack of interest. If the auction house notices the lack of interest in the artwork despite the announcements, the newspaper coverage, the PR, it will decide to withdraw the artwork form the auction to avoid getting burned. In May 2017, Egon Schiele’s Danae was pulled from Sotheby’s auction presumably for that exact reason.
Sometimes the artworks get pulled out of the auction just hours before the auction starts, leaving collectors confused and empty-handed.
Auction houses sometimes deliberately estimate an artwork below its true value as lower prices are known to raise interest and attract buyers. A cheaper lot is less likely to get burned, even if that means selling it at an unreasonably low price.
Also, low estimates can be used to create hype around a certain sale. Think about it, what is more likely to attract the attention of the press — an artwork that’s sold for the estimated price of $2,2M or the same artwork sold for $2,2M a whopping $400,000 above its high estimate. In this case, putting the estimate low is a good way to manipulate the market by making it seem like the demand for certain artworks or artists is on the rise, even if that’s not really the case.
Art auctions are one of the biggest art sales channels out there, and it would be fair to say that the art market would not be the same without them. But before you dive into them head first, you should be aware of some less savory processes, that make art auctions elusive and more opaque than you could ever imagine.