‘THE ART NEWSPAPER, No. 141, NOVEMBER 2003 Auction house settlement Winning twice? Economists say the payments are unfair Not an eyebrow has been raised about the shar-out of the pay ‘ments made as part ofthe settlement in the Sotheby's and Christie's duction house collusion affair Under is terms, success sellers receive about one percent of the sles price, while successful buy ‘rs receive five percent ofthe sales price. I'8 uncontroversial that Commission fixing is wrong, and that losers should be compensat- ced. Afterall: if beeause of commission fxing the price paid by buy- es increases by five percent, shouldn t buyers be compensated for this? And if sellers pay only one percent more on the object sold, ‘should not they receive significantly less than buyers? This would seem tobe good and simple economics. Simple bus, wrfortnately wrong, At auction, bidders take into account the relevant economic va ‘abies in their bidding decision. hese include the number of par- ticipants, the value ofthe object othe bidders and the commission rates, known to both sellers and buyers. Ifthe commission rate increases, the actual bid (before commission) will decrease by the same factor in order to keep the effective price paid by the buger ‘equal, Thus, changes in commission rates do not change the price ‘paid by the buyer: they just affect the hammer price, There 1s nO logical reason in this station to compensate buyers. Sellers, how. er may lose since they receive a lover price for their object But this isnot the whole story. Commissions have an impact on buyers” and sellers” participation. Sellers who are worse off because ofthe commission may decide not 0 auction their objects orto increase reserves. Fewer objects 10 be auctioned lead to more competition berween buses, and thus to higher prices. This in turn can dissuade potential buyers to participate in the auction. The resulting welfare anaiysis therefore depends on how elastic the ‘artcipation decisions of buyers and sellers are. In fact, success- Jia bers can end up better of despite higher commissions If sel ‘rs respond to the increase in commissions by seting higher ‘reserves rather than withdrawing from the auction, the auction becomes less attractive to buyers. This means tha the buyers who pprricipaie n'a purchase may faceless compertion and end up | paying a lower price 10 win the auction. The method used to | share the settlement in the class action seems inappropriate. It sives the short end ofthe stick othe sellers who clearly have not een compensated properbs. Actual buyers receive most of the money while it i debatable whether they should receive any. “Another welfare [ass comes from transactions that have not taken place due to higher commission, but itt clearty not easy o.com Densate the “would-have-been" buyers and sellers. Orley Ashenfelter (Princeton), Victor Ginsburgh (Brussels), Kathryn. Graddy (Oxford), Patrick Legros (Brussels) and Nicolas Sabuguet (Brussels). They all each economics.