Art Arbitrage - Violations of the Law of One Price Created by Fine Art Auctions

Although fine art is becoming increasingly popular as investment, its price determination is relatively opaque. This paper expands upon the work of Pesando (1993) and Pesando and Shum (2007) concerning the law of one price in the art auction industry. By examining the sale history of silkscreen prints from Andy Warhol’s 1970 series Flowers, this paper controls for the physical characteristics of particular artwork and seeks to determine the likelihood of sale and price differentials created by specific auction environments. This paper further examines the extent to which auction houses take into account these auction environments when setting presale price estimates, as well as how correlated these estimates are to the final realized price of a work. The results suggest that significant factors impacting likelihood of sale and final realized price for a work include the average price of the total sale it was included in—indicative of spillover effects from other works in the sale. The results also suggest that on some level, auction houses set presale estimates strategically, based on factors aside from market trends and the inherent quality and condition of the work. Larger, more established houses are likely more strategic at setting estimates—valuing lower to increase the probability of sale