An auction is a system buying or selling artworks where the seller puts them up for a bid, takes the bids and finally sells them to the highest bidder deemed as the winner. This system or the process is often facilitated by auction houses and auctioneers.
Types of Auction may be listed as under.
English Auction – The most common form of auction these days is the English Auction or open ascending price auction where the participants openly bid against each other. Each bid is required to be higher than the previous bid. The bids may be announced by the auctioneer, bidder, a representative or electronically. The auction ends when there are no further bids and the highest bidder pays their bid. The most important aspect here is that the current highest bid is always known to the potential bidders.
Dutch Auction – the auctioneer in a Dutch Auction or open descending price auction begins with a high asking price and it is lowered until a participant bidder accepts the price or till the lowest limit set by the seller is reached in which case the lot remains unsold. This type of auction however is neither very popular nor is it widely used.
Sealed first-price Auction or Blind Auction – in the blind auction or first-price sealed-bid auction all the bidders simultaneously submit sealed bids so that no one knows what the others bid. The highest bidder then pays the price and gets the artwork. The unique feature of this kind of auction is that each bidder may submit only one bid each. When used in the context of government contracts or actions these kind of auctions are termed tendering.
Vickrey Auction – Vickrey Auction or sealed-bid second-price auction is essentially identical to first-price sealed-bid auction, except that the winning bidder pays the second highest bidding amount not his own. This type of bidding is most commonly used in automated contexts such as real-time bidding for online advertising.
All-pay Auction – in these kinds of auctions all the bidders must pay their bidding amounts irrespective of the outcome. The highest bidder wins the item however everyone has to pay, hence the name.
Auction by the candle – this is an interesting kind of auction where bids are laid on the table till the candle is burnt out. This is when the highest bid wins.
Bidding Fee Auction – also termed as penny auction, requires each bidder to pay a fixed price typically one penny higher than the current bid. When the time expires the highest bidder pays the final bid price which is typically much lower than the value of the item. However, since all the bidders pay up a bidding fee, the seller ends up receiving a significantly higher amount than the value of the item.
Buyout Auction – here an additional set price or a buyout price is fixed, which any bidder can accept at any time during the auction and end the auction by winning the item. These options can either be temporary or permanent. The buyout price too may vary or stay the same depending on the rules of the auction or the seller.
Combinatorial Auction – here more than one items are put up for sale and the bidders place their bids on the principle of “all or nothing” to buy “packages” instead of individual items. To elaborate further it means that a bidder may place a bid on two pieces and specify that they will pay only if they win both. Concluding the winner in such auctions is a highly complex task.
Japanese Auction – this is quite similar to the English Auction with a twist. No new bidders can join once the bidding starts and the auction happens in rounds. Each bidder must continue bidding in each round or drop out if they do not want to bid.
Mystery Auction – here the bidders bid for boxes or envelopes of items that are undisclosed. The hope is to win something humorous, interesting or valuable.
No-reserve Auction – no reserve or absolute auction does not have a reserve price set by the seller. Thus the piece in question is sure to be sold off regardless of the amount of the highest bid. These kind of auctions tend to attract more bidders.
Reserve Auction – is a kind of auction where the piece may not be sold if the highest amount does not satisfy the seller. The reserve price may have been set which is disclosed to the auctioneer but not necessarily to the buyers. The seller may allow discretionary decisions to the auctioneer or set a fixed price. If the reserve price is not set, then the seller reserves the rights to accept or reject the final bid. It is generally a safe option for the seller as they are not required to accept a lower bid, however the interest generated may be a little on the lower side.
Reverse Auction – here the roles of sellers and buyers are reversed, with an intent to come up with the lowest possible price. The sellers bid the best possible or lowest possible price for the piece and the buyer compares the bids from different sellers who may make multiple bids in competition with each other and then award the win to the lowest bid. The open bidding by the sellers ensures a transparency for a fair award.
Senior Auction – this is a variation of the all-pay auction. Here, however, only the top two bidders are required to pay their full bid amounts and only the highest bid wins the item. The intent is to make the top bidders bid above their upper limits as they would not want to lose on a bigger amount for a smaller rise in the bid.
Silent Auction – this is a variation of the English Auction with one difference, there is no auctioneer to conduct the auctions. The auctions are conducted for a number of pieces at the same time in the written format. The bidders bid by writing them down on paper next to the piece being sold. They usually have a fixed starting amount, predetermined bid increments, and a “buy now” amount called “guaranteed bid”. The highest bidder pays the price he submitted and wins the piece.
Top-up Auction – primarily used in charity events, top-up auctions are a variation on all-pay auctions. The losing bidder here pays the difference between his bid and the next lowest bid, while the winning bidder pays the amount bid for the item.
Walrasian Auction – in these kinds of auctions the auctioneer takes bids from both the buyers and sellers in a multi-goods market. The auctioneer raises or decreases the prices to finally reach a conclusion where the prices from both the sides match.
Early Days – before the regular form of auctions came to be, the practice was to price each piece and then invite purchasers. The process was commonly used across all business fields, however in case of paintings or art it was particularly a long drawn out and dry process. The first significant auction of art collection to come under the hammer was that of Edward, Earl of Oxford in 1742 and was one of the best attended auctions of the times. Some of the notable mentions of these times were Dr. Richard Mead’s collection, suctioned by Abraham Langford in 1754 and Duchess of Portland’s collection auctioned in 1786. High prices, however did not become general until the end of the 18th century with Calonne (1795), John Trumbull (1795), and Bryan (1798) sale.
The quality of the paintings or artworks being auctioned, however, was not very high at least till the latter half of the 18th century. The import of art of significant values had assumed extensive proportions by the end of it. England became the asylum for valuable articles and the political convulsions of the rest of the continent made it the richest in terms of the art it housed.
Mid-19th Century – the great concentration of art treasures in England led to a better critical knowledge of the pictures. The latter part of the first half of 19th century saw a unique set of collectors, those who had come into money through industries and business mostly in the midlands of Northern England. Unaware and unruffled by the traditional etiquette or methods of collecting, their patronage was almost exclusively extended to the artists of the day. These collections began to disperse in 1863 and continued for many more years to follow. Oils and water color renditions were bought for generous remunerations directly from the easel or from exhibitions and these purchases commonly brought in far more than what they were acquired for.
The 1870s saw a significant appreciation in the value of water color drawings. The demand for artworks by modern artists was at a high in the 1870s and they sold at fabulous prices. The fag end of the 19th century and early 20th century saw a decline in their demand.
Late 19th to early 20th Centuries – towards the last quarter of the 19th century and in the first decade of the 20th, the demand for artworks by Reynolds and his contemporaries and his successors, particularly female portraits was the chief feature in art sales. Exhibitions of the 1860s revealed an unpredictable charm and wealth in the works of English artists who had almost fallen into oblivion.
Between the 1880s and the first decade of the 20th century there was a considerable appreciation in the prices of the artworks from the then modern continental schools, French in particular. A distinct feature of the Edwardian market was a demand for the 18th century painters like Watteau, Boucher, Fragonard, Pater and Lancret in particular. “Specialism” was an important development in art collecting that manifested between the middle of the 19th century and Edwardian period explaining the high average quality of the collections of drawings of the period by the Old Masters. During the alst years of the 19th century there was a marked commercial appreciation of mezzotint portraits and of portraits printed in colors. There was a general trend to increase the prices of the genuinely great artistic prices even to a sensational extent. The early 20th century saw the rise of an acute competition in the field largely due to American and German acquisitiveness. In this period the demand for the finest works of art of all descriptions severely exceeded the supply.
Late 20th Century – In 1970, Portrait of Juan de Pareja by Diego Velázquez sold for $5.5 million. The sale tripled the previous world record of a decade earlier. In 1990, Vincent van Gogh’s Portrait of Doctor Gachet sold for $82.5 million. The trend brought the maestros to spotlight causing the significant appreciation.
21st Century – In November 2013, $142.4 million was paid for the 1969 triptych, Three Studies of Lucian Freud, by Francis Bacon. The highest price ever paid for an artwork at auction was Pablo Picasso’s Les Femmes d’Alger (Version O) (Women of Algiers) that was sold by Christie’s in May 2015 for $179.4 million.
Market Structure – the glorious period for the art auction houses of the late 1980s ended in the 1990s when the market collapsed. European Union that enjoyed the position of the largest art market was overtaken by the USA which had 47% of the global share in 2001, with UK sliding to rank 2 with 25% of the share. In continental Europe France was the dominant location, but its share started eroding since the 1950s. Hong Kong continued to dominate the Asian market and it still does.
The latest trend of an appreciation in the Chinese art market in terms of size of its domestic sale and in terms of the significance of its buyers combined with a rich cultural heritage of art has effectively ended the duopoly of London and New York that lasted for over 50 years.
Competitors – Christie’s and Sotheby’s are the leading auction venues. In 2002, LVMH acquired Swiss art advisory firm de Pury & Luxembourg and merged it with Phillips to form Phillips de Pury & Company, with the aim of breaking the duopoly at the top of the market.
Segments – Fine art auctions are generally held separately for Impressionist and Modern art as well as for Post-war & Contemporary Art. Pablo Picasso’s works remain the most coveted lot as of 2004. In 2008 just over a million of art by Damien Hirst was sold at auction, a world record for a living artist; however in 2009, Hirst’s annual auction sales had shrunk by 93%.
Estimates – “Estimates” are as much a reflection of the consignor’s ambitions as the specialist’s considered opinion. To secure consignments auction houses often concede high estimates for the benefit of the art owner. As a practice buyers or prospective bidders resort to the opinion of the specialist in the auction house who quotes the estimates. It is common for the specialist to advise the prospective bidder to go beyond the estimate to secure the artwork.
Commissions & Buyer’s Premium – it is through a contract that the commissions of the auction houses are worked out. The auction houses charge a fixed commission from the sellers which is typically a percentage of the final bid price for which the artwork is sold finally. The artworks sold through auction houses are further subject to an additional fee called “buyer’s premium”, referring to the fact that by selling the artwork, the auction house is performing a service for the buyer that is further chargeable. Thus, the buyer and seller of the artwork sold by the major auction houses pay them a fee.
Performance-based fees – this is a relatively uncommon practice where a percentage is charged when the hammer price meets or exceeds a high estimate. This fee, however, does not apply to online only sales.
Guarantees – an auction house may offer a guaranteed selling price or “guaranteed minimum”, a practice meant to induce confidence among the sellers to consign works and to give the bidders an impression that there is a number of interested bidders in that particular artwork. The guaranteed minimum is usually nearer to the lower estimate. However, during the economic lows the auction houses suffered as they could not honor the guaranteed minimum.
As a measure to safeguard themselves, boost the market, and reduce volatility, established auction houses sell a work to the third party for a minimum price to the third party thus ensuring a ‘reserve’ for the seller. In case the bidding stops at or below this minimum figure that remains undisclosed, the third party then acquires the piece. If the bidding exceeds the minimum figure, the profit is split among the third party, the consignor and the auction houses, the percentages of which vary as per the contract.
Online sales – it is essentially an auction held over the internet. These auctions have been taking place even before the release of the first web browser for personal computers. The scope and reach of these auctions have been boosted exponentially by the internet to a level beyond the stakeholders’ anticipation. The main advantage and the defining characteristic of an online auction is the removal of physical limitations of traditional auctions such as geography, presence, time, space, and selective target audience.
Auction Sniping – in a timed online auction, the practice of placing a bid superseding the current highest bid at the latest time possible, usually seconds before the auction is supposed to close, giving the other bidders no time to respond. This can be done manually or through specialized software or even through online sniping service. This is one of the more controversial practices to which many object as they consider it an unfair practice.
Shill Bidding – in online auctions the sellers sometimes place fake bids in an attempt to unfairly raise the final bid of the auction. This is considered an unlawful act as the winning bidder ends up paying more than they should have.
Fraud – there is a significant rise in fraudulent activities with the rising popularity of online auctions. This is typically done by placing a highly lucrative auction with a really low starting price. Once the auction is over, the winning bidder pays up and the seller fails to deliver the product or in many cases sends over a fake or damaged or restored artwork thus defrauding the bid winner.
Sale of stolen goods – online auction websites are used by thieves to sell stolen goods to unsuspecting bidders. It is quite common these days for organized criminals to steal and put the artworks up online for auction. The anonymity and the worldwide market offered by the internet makes this a safer option for such activities.
TYPES OF ONLINE AUCTIONS
English Auctions – in the English auctions where the auctioneers and bidders announce their bids and the winner pays what he/she bids for. This is the most popular practice as it uses a mechanism or system that people find familiar and intuitive.
Dutch Auctions – the Dutch Auctions are essentially the reverse of the English auctions. Here the price begins high and is gradually lowered until one of the buyers accepts the price. It has been observed that Dutch auctions have on average 30% higher ending price than first-price auctions, probably owing to bidder impatience.
First-price sealed-bid – this is where all the bidders make a single bid and the single highest bidder wins and pays the amount he bid. Strategically first-price sealed-bid auction and the Dutch auction are considered to be equals. The main difference between this and the English auctions is that the bids are not openly viewable or announced.
Vickrey Auction – this is identical to the first-price sealed-bid auction except one distinct feature that the highest bidder who wins pays what the second-highest bidder had bid.
Reverse Auction – the roles of the buyers and sellers are reversed here as multiple sellers compete to obtain the buyer’s business and prices. Reverse auctions bring buyers and sellers together in a transparent marketplace.
Bidding Fee Auction – this kind of auction requires customers to pay for bids which can be raised by a single unit of currency at a time. Here the bidder pays irrespective of the fact whether they win or not. The highest bidder pays the bidding amount and wins the piece.
There are a certain set of tips that can make the experience of auctioning pleasant for the seller when followed.
- It is prudent to explore a number of auction houses before zeroing in on one. It is important to evaluate the different financial terms, deals or specializations of the auction houses. Choose wisely and give the option of recruiting a private art dealer a good thought after the exploration.
- Negotiate on the auction house fee. It is important that the auction house does a good job and they are of great value to you, but there is a certain value that you too bring to them.
- Get your piece insured the right way, whether with the auction house or independently.
- Workout the logistic details and charges beforehand. These details when overlooked cause miscommunication and undue turbulence. It is important to find out about any cross-border trade restrictions.
- Once the auction houses is finalized, the seller should provide as much relevant information about the piece as possible.
- Research the art market in general to understand the right moment to sell the piece. The trends of the market define the possibility of a successful sale of the piece with satisfying results.
- Let the correct person at the auction house know of your expectations quite lucidly, in writing. Document all the telephonic conversations and any other kind of conversation. The responsibility for certain research may be assigned to you from the auction house, maintain clarity from the very beginning.
- Consider the right location and the date to auction off your piece in consultation with the auction house as they have a clear expertise in the same. Though these choices may sound insignificant but they have a strong bearing on the amount any piece procures in an auction.
- Figure out the best possible timing and work out the deadlines and requirements from your end in an apt manner to ensure that the piece is consigned to the auction house in time to be included in the most favorable sale.
- If the low estimate is too low, you may end up selling it too cheap and if the high estimates are too high potential bidders and buyers may get intimidated. The estimates should be setup after an extensive study & research.
- After the low and high estimate has been decided on by the auction house, set a reserve price with their consultation that you are happy with. However, the reserve price cannot be higher than the lower estimate printed in the catalogue for the auction.
The bidders or the buyers need to have a basic understanding of the whole system. Apart from the basic knowledge, there are some tips that a bidder does well to know.
- A bidder needs to conduct an extensive research on the piece. Read up on the information available in the auction catalogue. Also a research should be conducted to figure out if there are any other ways to buy the same and an evaluation of it all should be carried out.
- A thorough check for the condition of the piece needs to be carried out and a comparative analysis needs to be carried out to get a better idea of the worth and value of the piece.
- Research the auction house and the auctioneer to get a clear understanding of the policies and the reputation and take an informed decision.
- If need be, register as a bidder for the auction well in advance, especially if it is a popular sale or auction.
- It is definitely advisable to raise the paddle instead of other gestures, as a body gesture may be mistaken as a bid and you might end up paying for it.
- Do not impulse buy when it comes to auctions. While waiting for your lot or any other formality, it is against advice to bid for anything that might seem lucrative then. Buys without a prior condition check or information may end up as a big mistake.
- In case the rival bidder is timid or hesitant, it is effective to take on a little bit of an aggression. This tends to send a message that you are not planning to back down and might discourage the rivals.
- Set up your highest limit and stick to it. Do not announce it to the competition or to the auctioneer in any manner.
- It is important to stick to your limits, however, use discretion and raise your bids if the piece or collectible seems worth it.
- It is important to be careful to not get caught up in a bidding war, simply out of one’s competitive instincts.
- It is better to bid in person, if you cannot be physically be present it is better to bid through an expert, a dealer or a collector for a fee or in exchange of some other favor. This is always favored when compared to bidding in absentia.
- Be aware of the payment terms and conditions before you prepare to attend the event. It is better to go equipped to pay up front for your purchase. You may actually negotiate the final price if you pay up immediately or in a short time.
- Check up on the pick-up and delivery options that the auction house has listed out for the sale of your desired piece before bidding on it and make necessary arrangements if need be.
- It is important to find out about the buyers’ premium that is being imposed by the leading auction houses. This is a premium you pay to the auction house not the seller.