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Do Art Gallery Practices Constitute Restraint of Trade?

Discrimination on the basis of lack of wealth or renown, on the other hand, only seems snobbish but isn't illegal. The economic concept covering these practices of the art trade is that of "market externality," which refers to positive and negative byproducts of consumption.
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Walking into a car dealership, one assumes that the automobiles in the showroom, as well as those in the lot, are for sale and that the only questions for the buyer and seller are options, price and financing. The price and financing are also part of the discussion when an art collector looks to buy a work of art from a dealer, and even options (framed or unframed, crating and shipping, insurance) may come into play. But there the similarities end. Works on display in an art gallery may be for sale to anyone who wants to buy them, but maybe not. (A price list might not even be available.) Some art buyers may get first dibs on any and all works on display and a better deal to go with it than others not on an A-list. Some dealers require buyers to earn their way onto a waiting list for the work of particularly sought-after artists, requiring collectors to buy pieces by other artists the dealers happen to sell. Art buyers might be required to sign a contract obligating them to sell the artwork back only through the gallery where it was originally purchased or that the artist be paid a royalty when the work is resold or that the art can't be sold at all but only donated to a museum. Imagine how few automobiles would be on the road if those were the requirements for buying one.

Of course, automobiles are mass-produced and works of art are unique and relatively rare. Still, collectors of the work of highly touted artists are required to put up with a situation that in most other realms would be considered intolerable. Most, but not all: Certain restaurants, nightclubs and hotels don't operate on a first-come, first-serve basis but seek out those who are well-known or particularly attractive, turning away others who don't add some measure of allure to the place; the boards of directors of New York City co-op apartment buildings interview those seeking to purchase an apartment, rejecting prospective buyers for reasons that may be purely aesthetic and completely unrelated to the ability to afford the cost and be a respectful neighbor. With art galleries, too, the market may determine the price but not the eligibility to make a purchase.

The art trade doesn't exist outside of economic theory and consumer protection, but it does have its own set of rules that may range from the objectionable to the legally unenforceable. In the realm of commerce, the general rule of thumb is that no one has to do business with anyone that he or she does not wish to do business with, and the only reason for a cause of action would be if the decision were based on race, national origin, physical handicap, religion, gender or ethnicity. Discrimination on the basis of lack of wealth or renown, on the other hand, only seems snobbish but isn't illegal. The economic concept covering these practices of the art trade is that of "market externality," which refers to positive and negative byproducts of consumption. An art gallery selling the work of an artist it represents to a buyer generates income for both artist and gallery owner, but the sale of the same object to a well-known art collector or a museum produces not only money but also prestige for the artist and gallery. The gallery (and artist) may be willing to take less money for the artwork, or provide a greater discount, than it might for someone else in order to place the object into the particular collection. In that regard, the externality determines the price rather than the fair market, but only for that one artwork. Presumably, other works by the same artist will increase in value by association.

If the process of offering first dibs on available artworks to higher profile buyers acts against the interests of those who aren't as renowned, a waiting list disadvantages collectors even more by requiring them purchase more than just what they wanted. "I try to favor our regular clients, particularly those who buy across-the-board, not just one or two artists in the gallery," New York City gallery owner David Zwirner said. When a collector has managed to get on the waiting list for a work by the artist that he or she admires, that buyer may need to snatch up whatever is available (sight-unseen?) or risk being removed from the list. John Szoke, a New York publisher and dealer in fine art graphic prints, noted that "it affects your general attitude about the collector who doesn't want something," and Zwirner described "a person who doesn't buy when called" a "problem. Obviously, you can't offer the collector a choice -- this is what I have available -- and why buy something you don't like? However, I'll probably drop the person down the list. After all, I made the effort to make the work available."

These and other dealers are taking advantage of the interest in a particular artist's work in order to increase their own income but, presumably, the collectors in question are so keen to reach their goal (impress others? think more highly of themselves?), spending perhaps recklessly in the process, that the transaction brings value to both sides. Tyler Cowen, an economist at George Mason University, described "price discrimination and maximum revenue extraction" as basic tenets of commercial art galleries, explaining why their "screwy practices persist."

At some point, however, the restrictions that artists and art dealers apply to the sale of objects may become particularly onerous and do not benefit both sides. For instance, a number of art gallery owners require buyers of certain artists' works on the primary market to sign an agreement assuring that the works will be resold exclusively through them. The control that dealers want for the first sales -- to place artworks in good collections -- they also want on the secondary market, and one reasonably may assume that these gallery owners know where the most avid private and institutional buyers are for a given artist. However, the individual who originally purchased the artwork might believe that he or she could do better bringing the art to a different gallery or even to auction. Complying with the purchase agreement potentially restricts that person's ability to earn a profit (what if the gallery owner offers a sizeable discount to a favored collector?), and the agreement itself may be a restraint on trade.

Artists, too, have their own requirements. Some artists have stipulated that buyers of their work pay a five percent royalty (on the profit or just the sale price) to them if and when the artwork is resold. Marlene Dumas, a South African artist who currently lives in Amsterdam, makes known to buyers that she prefers they "donate her work to public institutions or help public institutions purchase her work through charitable gifts," according to one of her art dealers. The artist reportedly directs these galleries not to sell to collectors who look to sell rather than donate her work -- in effect, blacklisting errant buyers of her work - and a lawsuit filed against a Manhattan gallery in late March alleges that the gallery owner broke a confidentiality agreement not to reveal the name of the seller to the artist.

Other artists have established their own rules. Artists James Turrell and Sol Lewitt both have demanded that sellers of certain works of theirs apply to them for "transfer" documents, permitting them to approve or disapprove the sale to new owners. Gaining ownership of one of Lewitt's 1,260 wall drawings involves receiving permission from the estate, which requires someone (Sofia Lewitt, the deceased artist's daughter, or one of the estate's "trained assistants") to approve the intended wall (its condition and size) where it will be installed, and then one or more of the trained assistants will actually do the drawing or painting. If you own one and want to sell it, you must whitewash your wall and sell the design to someone who him -- or herself must gain approval from the estate and hire the assistants. If you move from one house to another, you must again whitewash the old wall and then ask for permission for re-installation in your new home from the estate (again hiring those assistants to repaint it).

What one actually purchases is a certificate, asserting that this is the official artwork (if it is a resale, the certificate will note the original installation site), and the artist's diagram of the drawing. After that, one pays for the services of the trained assistants.

These artist and gallery stipulations have yet to be challenged in court, and it is unclear how enforceable they would be. That may not matter: The fear of not being able to buy a favorite artist's work again, at least on the primary market, appears to keep collectors in line.

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