Art Market
Why the “Superstar Economics” of the Art Market Is Its Biggest Threat
An employee looks at the artwork '4-Chlorephenol, 2008', part of the artist Damien Hirst's exhibition 'The Complete Spot Paintings' at the Gagosian Gallery on January 12, 2012 in London, England.  Photo by Matthew Lloyd/Getty Images.

An employee looks at the artwork '4-Chlorephenol, 2008', part of the artist Damien Hirst's exhibition 'The Complete Spot Paintings' at the Gagosian Gallery on January 12, 2012 in London, England.  Photo by Matthew Lloyd/Getty Images.

At least 20 notable galleries closed up shop in the first six months of this year, some after decades of working in the art market. As an economist observing the art market for the last 20 years, I try to stay objective about the trends I see, but a gallery closure still gives me an emotional pang. I’ve been lucky enough to have interviewed hundreds of gallery owners in the course of my research, and I can safely say they tend to be very smart, knowledgeable, and passionate about what they do. They’re also extremely hard-working, and often underpaid compared to similarly educated counterparts in other industries.

What can be done about this accelerating trend of gallery closures, which, as I’ve observed before, poses a grave danger to the art market ecosystem as a whole? I believe the answer lies at least partly in collaboration, both between small and large galleries, and between a variety of different actors in the art market. But before we identify potential solutions, let’s examine why the art market is especially vulnerable to the logic of “superstar economics,” and what that means for galleries going forward.


Why superstar galleries dominate the art market

The superstar phenomenon is pervasive in the art market.  My research of the last few years has documented the increasing dominance of the top end of the market. A very small number of artists, and the galleries representing them, drive the bulk of sales value, while others struggle to survive.

While this top-heavy bias has increased over the last 10 years, the superstar effect has been observed for at least a century. In his 1920 book Principles of Economics, British neoclassical economist Alfred Marshall wrote:

“There never was a time at which moderately good oil paintings sold more cheaply than now, and there never was a time at which first-rate paintings sold so dearly. A business man of average ability and average good fortune gets now a lower rate of profits on his capital than at any previous time; while yet the operations, in which a man exceptionally favored by genius and good luck can take part, are so extensive as to enable him to amass a huge fortune with a rapidity hitherto unknown.”

Marshall attributed this dynamic to two factors: the growing accumulation of wealth in the hands of a few, and the spread of modes of communication. The former allowed prices to rise for items coveted by the ultra-wealthy, while the latter gave those with greater means the ability to reach wider markets or audiences than before. University of Chicago economist Sherwin Rosen’s influential 1981 paper “The Economics of Superstars” examined arts, sports, and other industries to further develop this idea, while Moshe Adler used the theory to explain why art consumers are prone to focus on a small number of famous artists instead of varying their consumption. Their insights help explain why large differences in earnings can often exist despite little or no differences in talent.

Adler demonstrated that when consumption requires specialized knowledge, the existence of stars didn’t necessarily derive from the differentiation of talent, but rather from consumers’ need to share common reference points. Adler’s theory also helps explain how the top end of the gallery sector has become so dominant.  Art is a large and relatively infrequent purchase for collectors, so new buyers, unfamiliar with the market, may attempt to reduce the search and information costs associated with deep connoisseurship by only buying well-recognized works, or works by famous artists from larger galleries.

This behavior reduces risk by relying on the established preferences of previous high-profile buyers. Collectively, these risk-reducing preferences tend to reinforce the superstar phenomenon: Works by the most famous artists are in highest demand, and achieve by far the highest prices. Galleries, especially the smaller ones, find it more difficult to sell a wider range of works.

A hundred years later, the two factors Marshall identified as driving the superstar economy—wealth accumulation and the ability to communicate and share information—are more salient than ever. Together, they create and reinforce the art market’s current top-heavy structure.


Superstar economics could cannibalize the gallery ecosystem

The outsize success of mega-galleries is not, in itself, necessarily a bad outcome. But their relative dominance creates difficulties for those smaller galleries who face rising costs and overheads, such as rents, attendance at fairs, and other business expenses, alongside the structural challenge of holding onto successful artists.

While primary market galleries still work closely with their artists, exclusivity is growing less common, as the art market becomes ever more global. My research (Art Basel & UBS The Art Market | 2017) indicated that in the primary market last year, galleries represented just over one-third of their artists on an exclusive basis. In the art market, young galleries do much of the early nurturing but have little hold on artists. Contrast that with other industries such as sport, in which stars are nurtured from an early age but are locked into strict contracts, with significant penalties for switching.

Many small galleries promote their artists with the help of the artist’s other galleries, in order to develop their careers and help establish their public presence. However, while a collaborative approach can be ideal, the lack of exclusivity can also be problematic. If more than one gallery represents an artist, a “free rider” problem may arise where one or more gallery may abstain or reduce their investment in costly promotional activities while profiting from the activities undertaken by others. Promotional activities are also specific to a particular artist, and are mostly non-transferable.

Furthermore, once a relationship is terminated between an artist and a gallery, these promotional costs are sunk and irretrievable. These structural conflicts may cause galleries to hesitate to undertake these costly promotional activities. Or, as is often the case, smaller galleries will bear the difficult and costly task of launching an artist into the market, without then sharing in the financial upside of their success if the artist leaves for a larger gallery. Although high-end galleries benefit from this system, they have begun to recognize that this dynamic is unsustainable, given the crucial role smaller galleries play in incubating and developing new generations of talent.

While in most other markets, a firm’s failure opens up market share for its competitors, this is not always the case in the art market, where small galleries produce a number of positive externalities. Their contributions to cultural and artistic production, distribution, intangibles such as an artist’s personal and intellectual growth, and other benefits are simply not captured in sales data. When a small gallery cannot compete because both buyers and artists flock to mega-galleries, the benefits it produced are not automatically transferred to big galleries. They are often simply lost altogether.

It is important to note that these issues are not necessarily new, and although we may hear of more businesses closing, there are also more people involved in art market than ever before, with over three million working in galleries and auction houses as of 2016. The art trade as a whole has proven to be remarkably resilient, maintaining and growing the number of businesses and employment over the last decade despite the vagaries of the market.

The problems of business longevity are also not exclusive to the art market.  Small retailers everywhere have been pushed off high streets by big brands, and other industries are likely to have fared worse. In the U.S. retail sector, nearly 10,000 more businesses closed than opened in the last quarter of 2016, according to the Labor Department’s data on business employment dynamics. Just over one-third of American private sector firms have been in business for 20 years or more. For companies in the arts, entertainment and recreational industries, the share is even lower, at 28%.

In a 2010 study I conducted for CINOA, the international confederation of art and antiques dealers associations, I surveyed art dealers from their member associations, and found an average length of time in business of 30 years. To be sure, this was a small, selective sample, biased by being only confined to CINOA membership, which by definition demands a certain longevity. But there are galleries in the primary market that have similarly weathered the test of time, such as Marian Goodman Gallery, currently in its 40th year in business, or Rhona Hoffman Gallery in Chicago, which celebrated its 40th year in 2016.

The problem is therefore not about the number of galleries closing in the art market. The real problem is that these small- and mid-sized galleries in the primary market form a critical part of the market’s infrastructure that no one can afford to lose.


A way forward: Thoughtful collaboration and a renewed role for ownership rights

What can small to mid-sized galleries do to try and achieve the longevity that we know is possible? While there is no one solution that fits all, small and large galleries must find productive, committed ways to work together. Although the industry appears to have moved away from structured, contractual ownership obligations between artists and galleries, these models have proven to work in other industries such as sports—think of Premier League soccer, where big clubs nurture young players and invest in them for years, but retain the right to penalize them or collect compensation if the players move to another team. Regional exclusivity, frequently built into many artist-gallery contracts already, is losing relevance in the current global market, where buyers search the inventory of galleries globally around the world online or at fairs.

One way to move in sync with these trends could see galleries define and regulate their trading and ownership rights, and structure contracts to include the definition of what a gallery actually “owns” when they represent an artist, and how they can be compensated for having these artists poached, whether that be an immediate financial payout, or a share of sales for a defined period. To strengthen their position, small and mid-sized galleries also need greater collaboration and communication with other market and institutional actors, such as auction houses or art fairs, on a range of issues from valuation to marketing.

Collaboration with each other through dealer associations is also critical in providing galleries of all sizes with one strong voice with which to speak to governments and policy makers, who in many cases still fundamentally fail to understand the creative and cultural activities that galleries undertake, and instead treat them purely as commercial retailers for tax and regulatory purposes.

Even as artists experiment with ways of reaching the market directly, relationships between artists and collectors still typically begin in a gallery, and I believe galleries should remain a crucial intermediary between artists and their collectors. They create vital breathing room between the acts of creation and promotion. Many galleries are themselves experimenting with new locations and innovative models of collaboration, including pop-up and temporary exhibition spaces such as the Condo project in London and New York. Others are finding more effective strategies within their current models, whether it’s reducing spending on high-end entertainment in place of more academically rigorous publishing, or simply maintaining a greater degree of flexibility in their vision for the gallery. While some of the more innovative models being tested all bring their own sets of issues and none provides a silver bullet, they do show that in the current market, creative thinking and working together will be key in helping this vital sector of the art market survive and thrive.

Dr. Clare McAndrew is a cultural economist who specializes in the arts, antiques, and collectibles markets. She is the author of “The Art Market,” an annual report published by Art Basel and UBS.