Caveat Emptor, Art Collector

Introduction

In July 2002 Alfred Taubman, the former Chairman of the auction house Sotheby's, lost the appeal in the United States of his conviction for price fixing with his firm's arch rival, Christie's. Within weeks he reported to one of America's hospital prisons (at age 78 his health was a concern) to begin his sentence of a year and a day.

Throughout this art world scandal Christie's has always maintained that Christopher Davidge, its former Chief Executive who was exempt from prosecution thanks to Christie's turning state evidence, was the sole rogue conspirator. No one currently working for the firm was involved in the collusion, it argues. The party line espoused by Christie's current management may well be correct, although it conspicuously fails to comment on the role its previous Chairman, Sir Anthony Tennant, played in the whole affair.

Nevertheless, art world enthusiasts can be certain of one thing. The morality that allowed these bastions of high culture to collude illegally and then lie about it repeatedly for seven years has not been discarded along with the principle participants. The same ethics are alive and well, and currently on view in London.

Theme and Variations

The recent scandal was all about fixing prices for vendors of art and antiques, and both auction houses introduced new, and more importantly different, commission rates for their vendors soon after the scandal became public. However, since Taubman's conviction and the settlement of the class action lawsuit that cost Sotheby's and Christie's $256 million each, both auction houses have increased their Buyer's Premium to equivalent amounts. This premium is the amount they charge each buyer for the privilege of being the successful bidder for any item purchased at auction (being prepared to pay more than anyone else was already known as the Winner's Curse, but the development of the buyer's premium must bring that old saying home to even the wealthiest collector).

Sotheby's was the first to increase its premium rate for items costing up to £70,000 from 17.5% to 19.5%, but Christie's adopted exactly the same premium structure the following month. These new rates are only applicable to items sold at their London headquarters. At both of their secondary salerooms in London the old structure and lower buyer's premium remain in place (see the following table for a comparison of Buyer's Premium rates at Christie's two salerooms in London). Despite the similarity in both price structure and timing, no one is alleging collusion on this occasion.

Buyer's Premium rates at Christie's in London (July 2002)
Hammer Price1 Christie's
King Street
Christie's
South Kensington
% Difference
£0 - £50,000 19.5% 17.5% 2%
£50,000 - £70,000 19.5% 10% 9.5%
> £70,000 10% 10% 0%

Of course, the auction houses are entitled to increase their prices whenever they choose, and given the size of the recent lawsuit settlements it's easy to understand why they have done so now. Nevertheless, it is still reasonable to expect the auction houses to treat their customers fairly. Conspiring to fix prices is generally considered unfair and the auction houses have suffered as a result, but unfortunately they have failed to learn from their recent public humiliation, and these new premium rates provide a good example of how they continue to discriminate against their clients, albeit in a more subtle and, this time, legal manner.

In July 2002 an auction of Arms and Armour was held at Christie's King Street headquarters, and the higher Buyer's Premium rate was charged accordingly. However, the Arms and Armour department is located at Christie's saleroom in South Kensington. That's where the department's staff has its offices, where the items for sale2 are stored, where all the work done in cataloguing the property is completed, and even where vendors are advised to send their property for valuation and consignment. So, why wasn't the auction held there too? Wouldn't that have been the most convenient location for the staff and most of the customers? Could it be that Christie's held the sale at its HQ in order to charge a higher premium rate and thereby increase its revenue?

In fact until a few years ago the Arms and Armour department was housed at King Street, where all its sales were held. Eventually, however, Christie's moved the department to South Kensington in order to make better use of the space at its King Street headquarters. To pacify the department's staff, who didn't want to move because they feared it would result in poorer customer service, the sales were continued at King Street. As anyone with common sense could guess, the disparity between the department's new office and the location of it sales caused additional logistical and communication problems, which ultimately resulted in poorer customer service anyway. Nevertheless, this inefficient arrangement was allowed to continue because neither side (management vs. department) would back down.

Some people may argue that since auctions of Arms and Armour rarely achieve high prices, the higher premium rate that Christie's charged in July could not have made a significant difference. Try telling that to the buyer of the sale's top lot3 that sold for £80,000. The new owner of this lot paid £2,900 simply for the privilege of buying it in St. James's rather than two miles down the road in the less salubrious borough of Kensington & Chelsea.

Nothing For Something

Perhaps additional benefits were available for the Arms and Armour buyers, given that they paid more to purchase items at Christie's HQ? Unfortunately, that is not the case. The benefits provided to buyers are exactly the same today as they were at the beginning of the year.

In their defence the auction houses would no doubt argue that their costs are higher at their main salerooms so higher premium rates are justified for auctions held there. This justification may sound convincing, but in fact the auction houses are not certain of their costs to that degree, and debates take place every year amongst their managers about which overheads should be allocated to which saleroom and in what proportion.

The truth is that the buyers in July's auction of Arms and Armour paid significantly more for their purchases, not because Christie's acted especially malevolently, but because the department's original concern for its customers backfired badly. In this case Christie's managed to discriminate against the clientele of one of its smaller departments simply by selectively increasing its Buyer's Premium, but otherwise maintaining the status quo.

Unfortunately, clients of the Arms and Armour department are not the only Christie's patrons who have been disadvantaged. Auctions of a few other South Kensington departments have been similarly affected. Smart buyers should simply ask: what criteria determine where a sale will be held? Why do some auctions take place at Christie's King Street and others at Christie's South Kensington? In the past when the prices for buyers were the same everywhere, this difference in location was not terribly significant. In the worse case it simply meant you might go to the wrong place when viewing the items for sale, or attending the auction itself. Now, it may mean you pay as much as 9.5% more on part of the hammer price.

Of course, it's not just buyers who suffer from this unjust price difference. Vendors should be equally concerned. Any of their property sold at the auction houses' headquarters is immediately more expensive, which will inevitably discourage some buyers; and even if the successful buyer can easily afford the additional charge, his money might have gone to the vendor rather than the auction house, had the sale taken place at the cheaper location. Clearly both buyers and vendors are disadvantaged by the new prices.

Careless Companies

However, the more worrying problem is the cavalier and systemic disregard the auction houses now have for their clients. Most staff at Christie's have no idea of the discrimination to which clients of their smaller departments have recently been subjected, and the managers who are aware of the issue have chosen not to correct the injustice because they want the additional revenue.

Both Christie's and Sotheby's are more than 200 years old, and being so very mature they long ago ran out of innovative ideas with which to rejuvenate their businesses. All the obvious innovations have been tried. If a new idea failed, it was quickly discarded; if it was a success, it was immediately copied by the competition. Now, in the shrinking market for their services, the auction houses are so desperate for increased profits that they have lost all sight of what's important for their long-term survival: the mutual success of their customers and their staff.

Should you ever be tempted to buy art or antiques at auction, think very carefully before you place that winning bid, and ask a lot of questions. Caveat emptor, art collector.



Footnotes

  1. The hammer price is the amount of the wining bid for an item sold at auction.
  2. A sale is an auction.
  3. The word lot is used in the auction industry to refer to any item, or collection of items, sold as a single unit. The top lot is the most expensive item sold in a given sale.

Further Reading

© 2002 Kevin M. Laurence
E-mail: Kevin Laurence
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