Q.11 What is an art auction? How does it function? What is meant by "hammered down" or "bought in" in the context of an art auction?

Mcaffee and McMillan describe an auction as a market institution that is bound by an explicit set of rules that helps determine resource allocation as well as prices based on bids placed by market participants. Auctions are useful when markets lack breadth (i.e. do not have numerous buyers or sellers) or depth(i.e. commodity does not have even an imperfect substitute). In such a situation, the market is unable to determine a standard price. However, an auction in such a circumstance could help determine a maximum price for the seller.

British auction houses such as Christie's and Sotheby's employ the English auction method. In the English auction, all bidders know the current high bid for an art work. Sotheby's and Christie's have branch offices also located in the United States. Refer to Fig 9.3 of handout. In the auction process, it is unlikely that there will be an underlying smooth downward sloping demand curve. More likely because of limited buyers and varying preferences, the demand curve is discontinuous and may be shaped as a stair step line curve. In order for individual A to become a successful bidder, he must bid an amount that exceeds the offer made by individual B who may have made the highest bid upto that point. This means individual A may still retain some of the consumer surplus (i.e. the positive difference between the maximum price individual A was willing to pay and his bid amount which was just enough to exceed the bid of the next highest bidder individual B). The auction process is able to determine the maximum sale price for the art work by extracting most of the consumer surplus from the successful bidder even though it might not be all of it. Typically the successful buyer will have a bid which will be greater than the artist's reserve price.

In those instances, when the highest bid in an auction is below the artist's reserve price, the painting will be "hammered down" at the reserve price and "bought in." In such a case, the seller or the seller's representative is rejecting the hitherto highest bid price and in effect ends up buying the artwork from himself or herself. So, as far as the auction is concerned a sale has been made but basically the current owner of the artwork retains the artwork. In the case of a new artist, this helps determine a base market price for the artwork the next time it is offered for bids.

Q.12 Write short notes on why households consider acquiring art works?

Households may decide to consume or save of their disposable incomes (i.e. income received by households net of all taxes). The decision to consume may relate to allocation of expenditures over a large number of goods and services. The decision to save may involve both real and financial assets. The U.S. Department of Commerce classifies acquisition of art work as consumption expenditures although in reality it helps build up the household's asset portfolio.

According to authors Heilbrun and Gray the decision to acquire art work in the household's asset portfolio depends on the following:

1. Extent of wealth or resources available to the household. 2. Expected return on the asset relative to return on other potential substitutes 3. Expected risk associated with the asset relative to other assets 4. Consideration regarding liquidity i.e. how quickly the asset could be converted to cash 5. tastes and preferences for works of art

Q.13 What are the different functions of museums? Which is the most important function and why?

There are six specific functions of museums. They are: 1> to collect and display art work - expenditures related to this category include spending that is related to curatorial work, exhibits, security, general administration, building and maintenance and public information. 2> art conservation - this may involve having/hiring a conservator and maintaining an up-to-date laboratory. If these facilities are unavailable, the function may be contracted out 3> research - this involves determining precisely the origin, authorship and character of each object in the collection. Often an in-house library is maintained for this purpose 4> education - this fits in with the civic responsibility of the museum. It is an important function to retain or expand subsidy from the local government, to gain an appreciative audience from whose ranks future financial supporters may be found 5> selling of membership - these provide a substantial share of the earned income for museums, and 6> development - this is important for fundraising from wealthy patrons, foundations, and federal, state and local governments

The most important function is the collection and displaying of art work as this function fulfills the main intent of the museum: to make works of art available to the general public and future generations as a national heritage.

Q.14 Why are museums regarded as a decreasing cost industry? Are museums justified in charging higher entrance fees for "blockbuster" events?

The cost of operating the display function of museums can be divided into two parts. 1> Basic operating cost of the galleries that includes heating, lighting, maintenance, insurance, office staff and basic security service. These costs can be regarded as the minimum costs that must be incurred to open the museum daily. Since these costs do not vary depending upon the visitors per day they can be regarded as fixed costs. Thus with larger number of visitors the cost per visitor of this component continues to decline. 2> The museum also incurs a marginal cost for each person/visit this being the cost of additional security, information and cleaning personnel. By adding the average fixed cost component onto the marginal cost will result in a downward sloping average daily operating cost curve. (Please refer figure 10.1 of handout). Thus museums may be regarded as a decreasing cost industry because with larger numbers of visitors, costs of opening the museum to the public can be spread over more visits. With larger number of attendees to an event likewise at a gallery the cost per display decrease.

Special collection events or exhibitions are called " blockbusters." Due to crowding they cause congestions and long lines. Pleasure diminishes with congestion due to long waits in lines, interrupted views of specific pieces, and congestion around the most popular pieces. Higher prices at these events, at least initially, would decrease congestion and raise the same revenues with increased pleasure for each participant.

Imposing an entrance fee or even raising them as in the case of a blockbuster event makes one wonder regarding equity considerations and whether this serves to filter out low-income visitors. But studies of price elasticity seem to indicate that imposing charges does not greatly reduce attendance. However what appears discouraging is that holding the price down does not seem to encourage attendance either.

Q.15 What are some economists' suggestions for managing a museum's collection or for improving distribution of art works among big, medium, and small museums?

Regarding management issues economists are concerned regarding the display and storage functions of the museums. Typically artworks in reserve (in storage) at museums vastly exceed those that are on display. Noting that museums are typically not-for-profit organizations, economists like to probe whether the right balance has been struck between the quantity of art owned and the amount of building space needed to display it. Using marginal analysis, economists might point to the benefit on the margin gained by investing an additional dollar in building gallery space relative to its use in gaining additional works of art.

Another contribution of economists has been to recommend "deacessioning" of art works at a museum i.e. a museum would sell an object out of its permanent collection such as was done by the Metropolitan Museum of Art in 1972. Reasons for deacessioning of art works would be to allow museums to better meet their chosen objectives or to let museums deploy their assets rationally. However this suggestion of economists has often raised quite a bit of controversy among the general public.

Since there is considerable uneven distribution of art works between big, medium and small size museums, economists have also suggested ways to ameliorate the situation.

Some suggestions by economists to museums are: 1> to have voluntary trade between museums so art works do not end up in places which have no need for them. 2> renting vs. acquisition- small and medium sized museums could rent displays from larger museums as the prices to acquire well known and quality art works are very high 3> division of labor or specialization- museums in a region could specialize in an area of art or art history. Donors would then pick the correct donation site. 4> joint acquisition- more than one museum could buy a piece and circulate it for display among the cooperating museums. 5> collection sharing on an international scale eg. Boston Museum making its extensive collections available to Nagoya Museum in Japan. 6> franchising of the larger museums- in this way a museum could display more of their stored pieces like at Guggenheim satellites around New York.