Understanding the artwork pricing: some theoretical models

This paper analyses the pricing of artworks created by an artist and sold for the first time in the art market, investigating the price-formation mechanism at work in the private art market. Assuming price-maximizing agents with both full and asymmetric information on market powers and reserve prices, a bargaining game theory approach is used to explore all possible channels (paths) that a new artwork can take to reach a collector or an auction house. The paper aims to identify the relationships between the artwork prices and the market power of agents operating in each channel of the market, and analyse the role information on private art market price formation. In the full-information model, the market power of each agent is key to identify the market channel that will be preferred by the artist and, then, her incentive in creating a new artwork. In the asymmetric-information model, assuming artists, galleries, and collectors have different levels of information on the quality of the artworks and on the characteristics of the artists, the potential disappointment for the sophisticated collectors and undertreatment for the unsophisticated ones emerge.