Figini, Paolo; Onofri, Laura --- "Old Master paintings: price formation and public policy implications" [2005] ELECD 115; in Marciano, Alain; Josselin, Jean-Michel (eds), "Law and the State" (Edward Elgar Publishing, 2005)

Book Title: Law and the State

Editor(s): Marciano, Alain; Josselin, Jean-Michel

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781843768005

Section: Chapter 14

Section Title: Old Master paintings: price formation and public policy implications

Author(s): Figini, Paolo; Onofri, Laura

Number of pages: 18

Extract:

14. Old Master paintings:
price formation and public policy
implications
Paolo Figini and Laura Onofri

1 INTRODUCTION

The puzzle of price formation in the art market, and for paintings in
particular, stems from the difficulty of applying the Marshallian theory of
value to this particular market configuration. On one side, marginal utility ­
and thus demand factors ­ are not sufficient to define the equilibrium price
of paintings; production costs, on the other side, are not able to settle any
natural value underlying a painting.
In the literature, two alternative positions on price determination coexist.
The first one states that `the demand fluctuates widely, following collectors'
fads and manias and paintings' prices are therefore inherently unpre-
dictable' (Baumol 1986, p. 10): no fundamental value can therefore be iden-
tified for paintings. The opposite view assumes that although a natural
price linked to production costs does not exist for paintings, market forces
determine prices for art objects, as for any other economic good (Frey and
Pommerehne 1989).
Following this second approach, the literature has recently focused on
the mechanisms of price formation in the art market. The heterogeneity of
works of art, the monopolistic power held by the owner of the painting, the
infrequency of trading, and the existence of different segments in the art
market constitute specific and problematic issues, linked to the determin-
ation and to the measurement of prices, the research has to deal with. The
first necessary step to evaluate the profitability of investment in art, as com-
pared ...