The Artist's Resale Right Revisited: a new perspective

This article was downloaded by: [Doshisha University] On: 14 August 2008 Access details: Access Details: [subscription number 786315548] Publisher Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK International Journal of Cultural Policy Publication details, including instructions for authors and subscription information: http://www.informaworld.com/smpp/title~content=t713639985 The artist's resale right revisited: a new perspective Nobuko Kawashima a a Faculty of Economics, Doshisha University, Imadegawa Karasuma, Kyoto, Japan Online Publication Date: 01 August 2008 To cite this Article Kawashima, Nobuko(2008)'The artist's resale right revisited: a new perspective',International Journal of Cultural Policy,14:3,299 — 313 To link to this Article: DOI: 10.1080/10286630802281889 URL: http://dx.doi.org/10.1080/10286630802281889 PLEASE SCROLL DOWN FOR ARTICLE Full terms and conditions of use: http://www.informaworld.com/terms-and-conditions-of-access.pdf This article may be used for research, teaching and private study purposes. 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The publisher shall not be liable for any loss, actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or arising out of the use of this material. International Journal of Cultural Policy Vol. 14, No. 3, August 2008, 299–313 The artist’s resale right revisited: a new perspective Nobuko Kawashima* Faculty of Economics, Doshisha University, Imadegawa Karasuma, Kyoto, Japan Downloaded By: [Doshisha University] At: 13:19 14 August 2008 [email protected] NobukoKawashima 14 Taylor 2008 International 10.1080/10286630802281889 GCUL_A_328355.sgm 1028-6632 30Original 00000August & and Article Francis (print)/1477-2833 Francis Journal 2008 of Cultural (online) Policy This paper revisits the debate concerning the legal provisions of the artist’s resale right with the aim of providing some new perspectives. Using recently released empirical studies, the paper argues that while resale right payments may be concentrated on established artists in value terms, small amounts will be paid to a large number of relatively unknown artists, particularly in the European market where lower value transactions are large in number. By drawing on the non-economic literature on pricing art in the primary art market, the paper suggests the rationales of the resale right, often seen as invalid in the past, may actually be valid. Art dealers will be faced with complex economic impacts as the resale right is legislated. Keywords: droit de suite; copyright; art market; pricing of art works; visual artists Introduction For decades in both Europe and in the US, the droit de suite, or the artist’s resale right, has generated debate – among lawyers, economists, artists, and dealers – on whether it should be included in copyright law. This is a right of the visual artist of original work, granting the artist a proportion of the sale proceeds (or on capital gain in some countries) of the art work to which he/she has copyright. The basic idea is that, just as a literary author receives a royalty each time a copy of the book is sold, the visual artist should be remunerated each time the art work is moved from one owner to another. Although the resale right originates from 1920s France and has been adopted by other countries in Europe and elsewhere, it has not been adopted by the United Kingdom and the United States (except for California), two jurisdictions with considerable influence in the international market of contemporary and modern art. Although this right concerns a relatively limited niche and special area in copyright law, relating only to the visual arts, the debate has persisted, with arguments for and against it forcibly made all the time. The debate seems to have been put to an end in the US in 1992 when the US Copyright Office, after a comprehensive investigation including two public hearings, decided not to recommend that Congress adopt the resale right into US copyright law. However, the parallel debate lingered in Europe, and led to the adoption of a Directive in 2001.1 The Directive stipulates that the Member States of the European Communities must establish minimum standards, entitling living artists for their lifetime, and their heirs for seventy years thereafter, to a percentage of sale proceeds each time an original art work is resold. Although the Directive became effective on January 1, 2006, those Member States without the droit de suite in 2001 were given a further four-year period (and another two more years if permitted by the Commission) to adjust before new provisions would apply *Email: [email protected] ISSN 1028-6632 print/ISSN 1477-2833 online © 2008 Taylor & Francis DOI: 10.1080/10286630802281889 http://www.informaworld.com Downloaded By: [Doshisha University] At: 13:19 14 August 2008 300 N. Kawashima to deceased artists. The UK, the most vehement opponent to the adoption of the Directive in Europe because of its strength in contemporary and modern art dealings (the relevant part of the market), finally adopted Statutory Instruments, coming into effect in February 2006, to comply with the EC Directive. It is notable that throughout the decades and on both sides of the Atlantic, the debate has involved repetitive arguments. On the one hand, and without much empirical data, much discussion has been made of the droit de suite as it relates to its rationale, expected effects on art markets, and enforcement practicalities. Sometimes, available data was inadequate to prove a point, but misused or stretched by an opponent or a proponent. On the other hand, and more fundamentally, the debate has been sustained by conflicting views about artists, dealers, and the art market, the two different conceptions of the art world that likely will never see a meeting point. One camp (mostly in favor of the resale right) has a romantic and aesthetic view, seeing artists as creative geniuses vulnerable to the exploitative dealers and speculative investors. Commentators in this group have argued that the true value of an artwork is often belatedly realized years after its first sale and that the droit de suite is needed to make up for the missed opportunity. In contrast, the other camp (mostly against the right) insists on the economic rationality of actors in market transactions, rejecting the argument that artists are coerced into contracting on unfavorable terms with dealers. For example, the former group argues that collectors do not buy art for investment purposes and are price-insensitive, the very opposite of the basis on which the latter would make analysis. Proponents for the resale right also argue that a newly imposed droit de suite for the seller would easily be passed on to the buyer by a price increase. But, according to an economic analysis, an increased cost of selling would actually encourage the vendor either to relocate the sale to a market without a droit de suite, or to factor the payment into his purchase offer for the art work in question. For these reasons, the debate has been stuck at an impasse, leaving proponents and opponents at a stalemate. This paper revisits the debate, aiming to provide some fresh perspectives from which to examine the issue. More specifically, it has a two-fold purpose. First, with the use of the data recently made available, the paper reexamines an argument made by proponents on the effects of the resale right. As has been mentioned, the lack of good empirical data has often hampered the quality of debate, particularly on this issue. It has often been said that, because the majority of artists end up in the primary market (i.e. the first sale of the work between the artist and the buyer),2 the right is irrelevant for them, while it enhances the wealth of a handful of star artists (and their heirs) whose works are resold in the secondary market (i.e. the resales of the work at public auctions, between art dealers and collectors, and among dealers). Whether this is an ‘undesirable’ outcome of legislation or not is another question, but it is still helpful to know more precisely how many and what kind of artists would particularly benefit from the resale right. Recently two empirical studies have singled out the segment of the art market that incurs the droit de suite specifically (i.e. the market of those works which are the subject matter of the EC Directive and the new UK legislation to comply with it). The studies, hypothesizing that the UK and the US had the right in the recent years, suggest the number of artists that would benefit from the resale right. I will argue that the resale right will benefit not only a handful of well-established artists but also a large number of relatively less well-known artists with lower value payments in the contemporary art market. Second, the paper investigates, albeit in an exploratory way, the relationship between the primary market and the secondary market. While the first section of the paper will discuss the number and scope of droit de suite payments in absolute terms, it will not fully Downloaded By: [Doshisha University] At: 13:19 14 August 2008 International Journal of Cultural Policy 301 examine the mechanism of the resale right and its impact on the art market. To obtain a comprehensive understanding about the effects of the resale right, the dynamics of the art market needs to be studied with such questions as the following: How do some art works make their way from the primary to the secondary market? Are primary and secondary markets inter-dependent, and if so, in what ways? How do actors (auctioneers, dealers, sellers, and collectors) behave in the primary and secondary art markets? What conditions and circumstances induce frequent resale, making the droit de suite more effective? A major stumbling block to tackling these questions, which are important to ask when a government considers whether to introduce the droit de suite into its copyright law, is the lack of data on the art market outside public auctioning. However, while systematically collecting data on transactions beyond the auction market remains very difficult, available research on the pricing practice and the meaning of art prices can shed light on the nature of the primary market and its relation to the secondary market. By extending the scope of research into such non-economic literature, this paper aims to provide a new perspective from which to examine the debate concerning the droit de suite. For such purposes, Section One will introduce one of the major opposing arguments, which will be examined by an empirical inquiry into the scope and scale of beneficiaries of the resale right according to the provisions of the EU Directive. Section Two will discuss the importance of understanding the primary art market, although the resale right is directly relevant only to the secondary market. It will then discuss the practice of under-pricing and hostility towards the auction market found widely among art dealers. After examining the implications of such practice and attitude among dealers to resale, the paper will conclude with a brief discussion of issues for future research. 1. Scale and scope of the royalty-eligible market 1.1. Debate on the effects of the resale right One of the major arguments against the droit de suite is related to the legislation’s adverse effects. From a practical viewpoint, a major problem of installing such a system is the cost of running the scheme. But from a theoretical viewpoint, a more serious problem is that the resale right will depress the initial sale prices, because the buyer would take the future cost of selling into account when making an offer. Most of the economists writing on this issue have generally argued that the resale right in this way would be a disservice to the majority of artists, while hugely rewarding the most successful ones (e.g. Filer 1984, Karp and Perloff 1993, Mantell 1995, see also Perloff 1998 for a summary of economic analysis on this issue). This logic of depression in the primary market, which is sound and solid in the economic framework, however, is disputed by non-economists who make the following extra-economic argument: … only those dealers who view art as a fungible commodity will be adversely affected by the resale royalty provision. Collectors who place the aesthetic value of art above its economic value will continue to buy what they like. The return of such investments is the pleasure of owning the work of art (DuBoff, 1989, p. 231) The point about the non-pecuniary utility of art may, however, be embraced by economic analysis, which would translate the utility into a pecuniary measure, albeit with difficulties, by evaluating ‘psychic return’ or ‘psychic benefits’ of art (Frey 2003, pp. 175–177). Other things being equal (accounting for the psychic return), the buyer would be deterred even though in a minimal way, by the introduction of a future transaction cost and become less Downloaded By: [Doshisha University] At: 13:19 14 August 2008 302 N. Kawashima willing to pay. It follows that art dealers, who rely on commission fees from sales (often fifty percent of the price), would gain less and accordingly have less resources for promoting the artists they represent. Although this scenario applies to the primary market, the negative impact on dealer earnings is more directly felt in the secondary market, in which art dealers are active. It is important to note that many of the dealers in the primary market, representing artists and playing a role of cultural authority for clients, in fact also participate in the secondary market, buying and selling art works at auctions and between themselves on behalf of the clients, thus profiting from the gap in the prices or from the commission. When one takes into account expenses related to running the gallery and making promotional material, selling works of art as agents of artists in the primary market does not make much money for most dealers. So for dealers who have a personal commitment to contemporary art and ambition to contribute to the making of art history, participating in the secondary market to cross-subsidize the primary market is common. In this way, the change in the secondary market will affect dealers’ activity for the primary market and, accordingly, their artists. Note that such negative effects of new legislation are less acutely felt by established artists, whose works are already in the secondary market and did not have to suffer from the depression in their first sales in the absence of the resale right. To them, the resale right, now legislated and applied regardless of when the first sale occurred, brings windfall interests (Mantell 1995, p. 26). On the whole, therefore, the resale right when legislated as unwaivable places more burden on non-established artists, forcing them to take risks and forgo a portion of their current income for a possibly larger income in the future (Filer 1984, p. 16).3 By the collector, if an art work was bought in the absence of the provision of the resale right, or if the buyer did not adjust his/her bid price downward to make up for the future payment to the artist, the resale right is experienced as an additional cost in selling the art work (Bolch et al. 1978, p. 696). Considering that the effectiveness of the resale right relies on the willingness of the collector to release the work into the market, this can be seen as an ironic result. Overall, opponents have argued that this royalty would disadvantage more artists than it would benefit, and that such a legal intervention is undesirable (Filer 1984, Karp and Perloff 1993). While many artists are tempted by an offer of a new economic right, however remote and unpredictable its effect may be, the following comments made by a relatively wellestablished British artist illustrates his instinctive understanding of this economic theory: I certainly don’t want to have an automatic resale right attached to my new work since this might well affect the price. I can charge [sic], with buyers asking for a corresponding discount to take account of this. (Anthony Green, House of Commons 2005, Ev63). Although the economic theories advanced so far are reasonable and convincing, they must be set against empirical studies. It is important to know approximately how many artists will benefit if a resale right is installed in the UK and the US, and what proportion they constitute of the whole population of eligible artists. For policy making, the ultimate question is whether the benefits brought about by a newly-legislated right outweigh its costs. It must be noted, however, that this right is set within copyright law, which should have no problem with rewarding successful artists. As a matter of copyright law, the alleged effect of income transfer from poor to well-off artists should not be a major concern, either. Copyright protection is provided equally to artistic works of various quality, and the success of individual artists depends on the market. Bifurcation into a limited number of superstars and a greater number of less successful artists is a well-known phenomenon in the cultural Downloaded By: [Doshisha University] At: 13:19 14 August 2008 International Journal of Cultural Policy 303 and artistic industries, and copyright law does not purport to ameliorate it. However, somehow during the course of this debate, opponents (and proponents) have often taken a perspective of, or confused the issue with objectives of, cultural policy, as if this were a matter of grant distribution aimed at encouraging emerging artists.4 Despite the importance of the very fundamental question on the number of beneficiaries, arguments made by both proponents and opponents have relied on anecdotes. In arguing that the resale right would disproportionately benefit a limited number of already wealthy artists and their families, Bolch et al. (1978, p. 696) quote a claim made by the Art Dealers Association of America that ‘only about fifty living artists have a resale market for their works, and ninety-nine percent of all art depreciates in value’. The number of fifty was later adjusted to ‘perhaps 300 out of approximately 200,000 working artists’ in the comment letter of the Association submitted to the US Copyright Office (1992, p. 68). The latter figure regarding depreciation is highly doubtful as there is no global data on initial sale prices. Likewise, the UK-government used to quote an anecdote that only six estates receive seventy percent of the royalties payable in France, despite a wider distribution claimed by the relevant French collecting society (as will be discussed later). 1.2. Empirical data on the art market The problematic lack of data has been partly rectified by two empirical studies released since 2005. This subsection discusses the findings of these studies and contrasts them with the negative argument that the resale right will benefit only star artists. One of the opponents to the resale right in the US, the art lawyer Merryman, relies on the presumption of inequitable distribution among the artistic profession. It is reasonable to assume that the majority of the artists have no secondary art market. But Merryman’s application, which views the nature of the US contemporary/modern art market as similar to that in Europe, inappropriately assumes that big names such as Calder, de Kooning, Hockney, and Stella dominate the secondary market (see Merryman 1997, p. 20). His opposition to the then-current proposal of the European Commission for the legislation relies on an empirical study (Camp 1980) conducted on the sales record of Sotheby’s in New York from 1973 to 1977. Camp finds that, during the period of the study, the sale of contemporary art was highly concentrated: the top five artists5 had about one-third of the sale value of all the works made by living American artists and resold at prices in excess of $1,000 (Camp 1980, pp. 152–153). The study was replicated with a larger scope by Wu (1999), who reached basically the same conclusions (see Merryman and Elsen 2002, p. 484, footnote 48). It must be noted, however, that the subject of the Camp study is exemplary of the highgrowth, speculative, and glamorous trade associated with contemporary art auctioning, typical of the high end of the New York market since the 1970s. Yet, this is only one aspect of the market, which has other ‘layers’ at international, national, and regional/local levels (Robertson 2005, p. 26). Two empirical studies on the secondary market of contemporary/ modern art (Graddy and Szymanski 2005, Kusin & Co. 2005), conducted on a much larger scale than the Camp (1980) and Wu (1999) studies mentioned above, show that a large number of artists will benefit from the resale right payment, albeit each in small amounts by value.6 The studies, which have recently become available, allow examination of the scale of the resale right payment resulting from the European Directive, focusing on the sale of eligible works found in auction data. The two studies use the same Art Sales Index. The following discussion is largely based on Kusin & Co. (2005), as Graddy and Szymanski (2005), commissioned by the UK Patent Office, focuses on the UK art market and British Downloaded By: [Doshisha University] At: 13:19 14 August 2008 304 N. Kawashima artists, while Kusin & Co. deals with data on Europe and beyond. Overall, the findings of the two reports are quite similar. The Kusin study, published by The European Fine Art Foundation (TEFAF), shows that if every country had the resale right for artists according to the provisions of the EC Directive, including the UK and the US, a total of 8,423 artists in the auction market worldwide in 20037 should have been eligible for resale rights (Table 1).8 The contrast between the US and Europe is clearly demonstrated by the data on the average price of eligible works sold in 2004: the average value of sale in the six major countries with the effective resale right (see Note 2 of Table 1 below) was 16,549 whereas the UK and US averages were 78,064 and 102,043 respectively (Kusin & Co. 2005, p. 27). Beyond Sotheby’s New York, thus, there are a large number of resale transactions of a much smaller scale. With nearly 8,500 eligible artists worldwide in this hypothetical calculation, it is clear that the artists represented here are beyond the familiar names of modern and contemporary art implied in opposing arguments. Admittedly, the majority of sales eligible for the resale right by value (over 80% in 2003, Kusin & Co. 2005, p. 12) relates to deceased artists who are very likely to concentrate in the higher price bands, while the majority of the eligible transactions are in the lowest price band of 3,000 to 50,000. The payment that these lowest band artists or their heirs receive is small. Nonetheless, there still are a large number of artists, though not Hockney or Stella, who still could have sold their works in the public auctions to the total of 355.3 million, consisting 31.1% of the total global sale of this particular market relevant to the droit de suite. As we include the next price band of 50,000 to 200,000, the number of artists represented jumps to nearly 8,000 (globally), and the two bands’ share is over half of the value of the global market. Taking the provision of Article 3 of the Directive that allows the Member States to opt to expand the coverage by lowering the threshold, something even the UK has chosen to do, the number of the beneficiaries still increases. Finally, as the resale right in the EU applies to sales between all ‘art market professionals’ (Article 1[2]), including those outside public auctions, the number of beneficiaries, particularly in lower bands, goes up even further. Although I have emphasized the absolute numbers of beneficiaries, opponents might note that the beneficiaries are a minority in the whole population of artists. As has already been mentioned, copyright law operates on market competitiveness, and the skewed or Table 1. Eligible works in public auctions in 2003. Breakdown by location of sale (millions of euros, numbers and shares). Price Bands (euros) Number of Works Number of Artists(1) Value (€millions) DDS6 (%)(2) UK (%) US (%) 3,000–50,000 50,000–200,000 200,000–350,000 350,000–500,000 500,000–2,000,000 Over 2 million 3,000–200,000 Over 200,000 32,130 2,511 391 158 220 42 34,641 811 6,918 1,011 231 99 135 29 7,929 494 355.3 231.6 103.8 66.3 199.6 184.3 586.9 554.0 27.5 14.2 12.3 6.6 7.8 4.5 22.3 7.4 18.3 27.0 27.7 33.5 32.9 17.6 11.0 26.9 27.4 37.0 50.7 47.9 56.4 77.9 31.2 61.5 Source: Kusin & Co. 2005, p. 47. Notes: (1) Both alive and deceased. (2) The major six countries (Belgium, Denmark, Finland, France, Germany and Sweden) which had and enforced the droit de suite in 2003. Downloaded By: [Doshisha University] At: 13:19 14 August 2008 International Journal of Cultural Policy 305 otherwise distribution is legitimate in this framework. Even setting this point aside, I would argue that the opponents’ contention, quoting the number of artists from national censuses against which the number of beneficiaries is set, is inadequate. US commentators often refer to the US Census, which had 107,476 artists in 1970 and 233,000 in 1996 (see e.g. Merryman and Elsen 2002, p. 484, footnote 47). In a similar vein, an oft-quoted study by Filer (1986), which has cast doubt on the image of ‘starving artists’ (often assumed as a basis for the resale right), analyzes the US Census of 1980. Likewise, according to the latest Labour Force Survey (LFS), the UK had 148,700 ‘working visual artists’ in 2000 (Davies and Lindley 2003, p. 7). More than half of the UK artists, however, are ‘employed’ as visual artists for their primary jobs (Davies and Lindley 2003, p. 15), which suggests that they are probably graphic artists working in design and other studios related to fields like publishing and advertising. The classification of ‘visual artists’ in the LFS includes ‘artists, commercial artists, and graphic designers’ (Davies and Lindley 2003, p. 4), which might extend to artists working in animation film, web design, and computer games, none of whom is eligible for the European resale right. The master copy of an original illustration by a commercial artist may well qualify as the subject matter of the European Directive and national copyright laws, but it is made primarily for multiple reproduction, not as a unique work (or for copies in a limited number, signed by the artist) for sale in the first place. Copyright law in the UK (and the US as well) has a ‘work-for-hire’ doctrine, whereby the employer is the first copyrightholder of the works made by the employee in the ordinary course of employment. For over half of the visual artists in the UK-LFS, thus, the resale right does not apply. In this way, for the purpose of the discussion on the resale right, the national census tends to overestimate the number of artists. Other available information on the number of artists only provides estimates of ‘professional fine artists’, but may be more helpful. These estimates are significantly smaller than that in the LFS for the UK, ranging from 60,000 to 90,000 by The Artists Information Company (House of Commons 2005: Ev2), to a more conservative estimate of 45,000 by the Visual Arts and Galleries Association (House of Commons 2005: Ev7).9 Most commentators, including Ginsburgh (2005) writing in the Kusin report, have highlighted the concentration of payment by value, ignoring the large volume of payments in lower value made to numerous, relatively unknown artists. Even before the Kusin study, some evidence cast doubt on the view that only star artists will benefit. Ramonbordes (2000) quotes the 1997 data of ADAGP (the French collecting society for visual artists), stating that the French droit de suite was distributed to 2,650 recipients (including 2,400 ADAGP members and 250 members of foreign societies), of whom 39 beneficiaries had the share of 30% by value, 270 beneficiaries had the same share, and the remaining 2,341 recipients had the share of 40%. Most importantly, 80% of the amounts levied went to living artists, not heirs. The figures of ADAGP distribution in 1990 are also available in the testimony by its General Manager Gutton in the New York hearing for the US Copyright Office. Gutton reported that his organization has collected resale royalties for 1,650 of its 2,500 members (85% of whom are living artists) of more than $10.5 million (see Table 2 for a rough breakdown of distribution). It must be noted that the French provision had a very low threshold of a hundred French Francs for the sale price in 1990 (US Copyright Office 1992, p. 156), and that Table 2 does not show the concentration of the royalties distributed. However, overall, the available data shown so far depicts a picture that is very different from that drawn from the Sotheby’s New York data, and suggests that star artists are not the only beneficiaries of the droit de suite. My assertion applies also to the US, if the country opts to adopt the resale right in its federal 306 Table 2. N. Kawashima French ADAGP distribution of the droit de suite in 1990, US Dollars. Payment 20–2,000 2,000–20,000 20,000–40,000 40,000+ Total (10,500,000+) Recipients 1,100 400 100 50 1,650 Downloaded By: [Doshisha University] At: 13:19 14 August 2008 Source: Comments by Gutton in the US Copyright Office (1992, Appendix Part III: 15–16). Numbers are approximate. copyright law, and if one starts to pay attention to the auction data in the whole US market. Table 1 shows strong presence of the US in contemporary and modern art sales in both the highest end and in the lower bands. 2. The primary market and the impact of the droit de suite 2.1. Importance of understanding the primary market The previous section has argued that, as the UK amends its copyright law and if the US follows suit, both the expected number of beneficiaries of the resale right and the scale of the payment are not as negligible as have often been assumed. However, we have not yet come to a full understanding of the impact of the right on the contemporary art market. Available economic literature has tried to demystify what has often been seen as the irrational and highly speculative nature of the art market in auction (e.g. Grampp 1989, Frey and Pommerehne 1989, Chs 6–8). (In contrast, little is known about the primary market, because transactions outside public auctioning are not systematically documented.)10 It is also known that the two major auction houses (i.e. Sotheby’s and Christie’s), to keep their high profile in the art and financial world and to avoid dealing with low-end items with little prestige, yet incurring administrative costs, take consignments only when they believe the items will sell for the prices above certain thresholds. By what mechanism, then, would an art work cross these thresholds? Also, if an art work is resold at a much higher price in an auction than the initial price, would the prices of other works of the same artist unsold in the primary market be adjusted accordingly? In sum, to what extent and in what way are the secondary and primary markets mutually dependent? Although the resale right is directly relevant only to the secondary market, a key to these questions, which will give us a rounded picture of the right’s impact when answered, seems to lie in an understanding of the primary market. The importance of research into the primary market is also related to the rationale of the resale right. One major weakness seen in proponents’ arguments, in addition to their allegedly sentimental and romanticized view of artists, pertains precisely to its rationale. France, Germany, and Belgium are the three countries notable for the legislation and its effective enforcement, and often looked upon as models.11 Available literature in the English language is limited on the legal theory to explain the nature of the right, but four rationales can be found as the following. Firstly, the German law is based on the ‘latent, intrinsic value’ of the art work, which is not realized at the time of the first sale (Hauser 1959, p. 106). With this perspective, because an artist’s imagination is ahead of the times, only years later is the ‘true’ value of the work recognized in the market. Also because the artist has worked hard to produce Downloaded By: [Doshisha University] At: 13:19 14 August 2008 International Journal of Cultural Policy 307 more works, his/her oeuvre has increased in value. In this case, it is reasonable to compensate for the cost of missed opportunity in the first sale, allowing artists to participate in the profit made (as opposed to the sale price prevalent in the French model).12 Secondly, the French law is based on ‘unjust enrichment’, referring to those who buy art works from artists cheaply and later sell them for larger sums of money (Pierredon-Fawcett 1991, pp. 13–14). The logic advanced here is that it is unfair for the collector to make huge profits without any specific activity or ability to add value to the work, and that the droit de suite is to ‘correct that inequity by giving a part of the owner’s gain to the artist’ (Pierredon-Fawcett 1991, p. 13). A third theory offered by Pierredon-Fawcett (1991, pp. 14–17) is that authors should benefit when circumstances have changed and that the initial contract is now seen as unfair.13 If we call this ‘inter-temporal unfairness’, then ‘inter-disciplinary unfairness’, namely, the alleged inequity between visual artists and literary or musical authors has also been invoked as a fourth rationale for the droit de suite. Proponents have argued that, in copyright law, inequity exists between authors and composers on the one hand and visual artists on the other. Whereas the former can exploit their rights extensively, visual artists produce unique works of art, and their reproduction has only a limited market opportunity. Thus, to redress the balance, the droit de suite is considered necessary. This is an explanation given by Hauser (1959) on the French resale right as a compensation for the exploitation of the work, in the same way that authors and musicians participate in the reproduction of the work. As such, it is considered appropriate for the artist to claim a royalty of the total gross price of each sale, not just on the basis of the added value the German ‘inherent value’ theory and the ‘inter-temporal unfairness’ theory suggest. These rationales have been cited by different people for varying purposes, but opponents have argued that none of these above rationales are appealing, particularly in the light of economic theory. To start with, the theory of ‘latent, intrinsic value’ of property has been found unhelpful in the legal and economic analysis of the artist’s right to a resale royalty (Bolch et al. 1978, p. 690; Filer 1984, p. 6). Equally, the argument that this is a buyer’s market and that the artist is virtually forced to accept any offer is viewed with considerable doubt. Criticism has been leveled particularly at the inconsistency between (1) the theory of the artist’s contribution to added value over the years, and (2) the actual provision in the German and French laws that, for the sake of administrative convenience, the royalty is levied on sale proceeds, rather than on capital gain. It is also very difficult to determine whether visual artists, when compared with their literary or musical counterparts, are seriously disadvantaged in economic terms and to decide whether the gap derives from the alleged inequity in copyright treatment of artists. The rationales above may seem weak, insofar the primary market is perceived to be efficient and competitive with no evident monopsony power (Karp and Perloff 1993, p. 169). However, in reality, little is known about the primary market: its size, the economic behavior of the artist, the dealer, and the buyer, and its relationship to the secondary market. With the dearth of research into the primary market, let alone into the interaction between the primary and secondary markets, it is impossible to examine all the issues raised here. The first step in research at this point seems to be to inquire into the way in which prices for first sales are determined by art dealers. Generally, the artist is the seller in the primary market, but the dealer as an intermediary plays a major role in determining the prices (in consultation with the artist). Pricing art works is difficult and seems subjective, but dealers must have methods of figuring out some workable prices, thereby reducing the uncertainty of business, generally inherent in the work of cultural managers (Greffe 2002, Ch. 3). Downloaded By: [Doshisha University] At: 13:19 14 August 2008 308 N. Kawashima 2.2. Pricing strategies of art dealers Velthuis (2005) has undertaken research based on such a premise to explore the pricing strategy of art dealers. Although some sociological studies have examined the relationship between artists and art dealers and the role of dealers as ‘gatekeepers’ in the screening of talent and collectively legitimatizing a new style of art (e.g. Moulin 1987, Peterson 1997, Crane 1987, Bystryn 1978), few have examined the mechanism of pricing at the galleries. Both an economist and sociologist, Velthuis discusses the meanings of price beyond the narrowly-constructed framework of neoclassical economics, drawing on the interviews with art dealers he conducted in Amsterdam and New York. Another useful source, albeit a mere collection of interviews with twenty-seven art dealers in New York, is Klein (1994). Unfortunately, Klein draws no analytical conclusion, but did ask consistent questions in the interviews, which were intended to glean insight into the business of art dealership. Both data, not of the quantitative kind, throw light on the relatively unknown business practices in the primary art market. One of the major findings of the Velthuis study is that the primary art market has two characteristics that will normally be seen as anomalies in neoclassical economics. One anomaly is that prices rarely or almost never decrease, and the other is that quality of different works made by the same artists and different levels of demand for them are disregarded in pricing. In other words, dealers would try to give ‘consistent’ prices across the works of the same artist, and not decrease them even though demand is weak, as doing so would suggest a deterioration of quality, something which should not happen.14 Also, even if both the dealer and the artist agree that one piece is better than the other in terms of artistic quality, and that one piece will be more popular among buyers than the rest, their assessment and hunch are suppressed in the pricing of the works. The key to understanding these practices is that prices of art works are symbolic of artistic quality. Note that the artistic quality here is a cognitive one, implied by the seller to the buyer, but not necessarily of inherent or intrinsic quality. The fact that prices signal quality in an information-asymmetric market may be well-known, but elsewhere Velthuis (2004, pp. 378–82) argues that his findings go beyond what the signaling theory holds.15 Consistent pricing over time and across the oeuvre of a particular artist is of major importance for art dealers not only for the purpose of reassuring collectors of artistic integrity, but also in avoiding any suspicion that prices are randomly given at a whim of the dealer or the artist. Prices thus have multi-dimensional values and meanings in the world of contemporary art. All of these principles and the meanings attached to art works lead galleries to the strategy of under-pricing. Although proving its prevalence systematically is difficult, it is known that, particularly as a result of the taboo on price decrease, art dealers constantly under-price art works at the outset and increase only slowly over time (Velthuis 2005, pp. 124, 163, Klein 1994, pp. 27, 81, 243). For Velthuis, this practice of under-pricing goes beyond the usual explanation given by neoclassical economists who rely on the thinness of the primary market (Velthuis 2004, p. 378, quoting Heilbrun and Gray 1993, p. 153). He (2004, p. 377) argues that price decreases in the contemporary art world can create ‘suspicion in the audience’ as one dealer puts it, and demoralizes the artist by hurting his/her self-esteem. Both of these results would negatively affect the demand and supply the dealer must manage. 2.3. Implications for the droit de suite What the Velthuis study suggests to us is that perhaps the German theory on the droit de suite is accurate when positing that the art work does not receive the price for its full value Downloaded By: [Doshisha University] At: 13:19 14 August 2008 International Journal of Cultural Policy 309 at initial sale, leaving its latent value untapped in the market transaction. This latent value theory has attracted virtually no attention in economic literature on the droit de suite. But the symbolic meaning of price greatly attached to art and the resulting practice of underpricing seem to be convincing and intuitively understandable. Velthuis (2005, pp. 135–136) finds no use for economic vocabulary, such as ‘demand’ and ‘supply’ in the dealer’s everyday model of pricing art works. Instead, the dealers would say something like the following: ‘if the market “bears” a price, this does not necessarily mean that the price is “right”’. A New York dealer has told the researcher that a work of an artist he represents is priced at $2,500, although its actual value should be $4,000. The dealer adds a most revealing comment to explain this difference: ‘It does not want that price yet’. The metaphor in the above comment, portraying an art work as if it was a living creature, is interesting, and supports the claim often made by dealers that they are engaged in a longterm strategy of adding value to the oeuvres of artists even by artificially depressing the prices in the primary market. The value of slow promotion, held dearly by dealers, is borne out by a quantitative study by Singer (1990). He argues that if galleries and museums push artists too fast into major one-person shows, this strategy tends to decrease the likelihood that the works of the current generation of artists will reach the auction market (Singer 1990, p. 4). Such a price mechanism is distinctive from that of the auction market, where sales of art works are of a one-off nature with every actor in the transaction trying to maximize his profit. The economic importance of reputation over an oeuvre as opposed to the quality of individual works has also been noted by Hansmann and Santilli (1997, 2001). By being a market to be created and nurtured by the dealer over the years, it is also different from the market of ordinary commodities (see Klein 1994, pp. 43, 56, 122). Although the practice of under-pricing may be resented by the artist who wants to obtain fair market prices at the point of sales, overall, it is a clever strategy to enhance the artist’s value, as the strongest determinant of prices is the artist’s attributes (his/her reputation) rather than characteristics of art works themselves (size, medium and subject matter) (Sagot-Duvauroux et al. 1992).16 According to a Dutch dealer interviewed by Velthuis (2005), thus ‘the fact that artists get lower prices than is actually fair is an investment in the future’ (p.155). Moreover (and this is where his discussion on the non-economic meanings of price plays out well), the initial low prices and the slow and prudent increase thereafter are meant to symbolize the caring and credible role of art dealers in the art world. Museums are always privileged as their acquisition gives enormous prestige to the artist’s career. Dealers say they ‘place’ an art work at a museum rather than ‘sell’ it (Klein 1994, p. 116), and discounts of ten to twenty percent to museums are common. The disposal of art works by museums is sometimes institutionally prohibited and at least infrequent. For us, thus, a sale to a museum significantly reduces the artist’s opportunity to receive the royalty from that particular work. Nonetheless, art dealers consider that prestige and reputation given to the artist would compensate more by increasing the values of other works, and sharing the cost of the discount with the artist. It seems that all of these rationales lend some weight to the ‘inherent value’ and ‘inter-temporal inequity’ theories as the basis of the resale right. 2.4. Hostility of art dealers towards reselling Another finding from Velthuis and Klein of relevance to our inquiry into the droit de suite is the negative view among art dealers about the secondary market, auctions in particular. Although the dealers discreetly make money by participating in the secondary market to cross-subsidize their promotional activities for the emerging artists they represent, dealers, according to Velthuis, consider the volatility of the auction mechanism harmful to the value Downloaded By: [Doshisha University] At: 13:19 14 August 2008 310 N. Kawashima of art. Because the prices at auctions are publicly available, they tend to signal the quality and prestige of the artist, a correlation supported by evidence in economic literature (Frey and Pommerehne 1989, Ch. 6). However, for art dealers, prices at auctions depend on nonartistic factors that are uncontrollable, such as the specific bidders in the sale room on that particular day and the specific art works placed next to the work in question. For the dealer, thus, the most directly and exactly expressed prices of auction sales are ‘elusive’, ‘chancy’, and ‘unpredictable’ (Velthuis 2005, p. 84). The dealer would likely maintain that, although both the pricing mechanism the dealer uses described earlier and the fixed prices produced out of it may appear to be more discretionary and whimsical, they are thus far more reliable than auction prices and more carefully constructed. Furthermore, the mechanism is beneficial for building the artist’s long-term career and for enhancing financial values of his/her ouevre. The opposition to speculative buying and selling in the secondary market is so strongly held by dealers that they dislike those customers who ask about the potential return of investment at the gallery. To sell an art work to a key collector is, again, to ‘place’ it. Indeed, dealers may even refuse to sell again to those who have the record of immediate selling at an auction. Admittedly, the dealers interviewed by Velthuis and Klein may represent a specific type, driven mainly by artistic endeavor, while many others may not be culturally bound and may act just like financial brokers (see Moulin 1987, Peterson 1997, Singer 1990). What is interesting for us however is that the opposition strongly made by associations of commercial galleries to the resale right in the UK and the US, apparently representing their self-centered economic concerns in the guise of the artists’ interests, starts to suggest that they would face more complex, mutually-contradictory economic forces. For those art dealers, who claim that their job is to help develop the artist’s career and are hostile to speculative buying and frequent reselling, the resale right is detrimental as it reduces the resources available to them for promoting artists. But it should also be welcoming to them to the extent that they see it as deterring speculators coming into the market. As the prices in the initial sales fall, the right encourages collectors, who have no intention to sell in the foreseeable future, to buy more, something desirable for those art dealers with a cultural mission. Nonetheless, by opposing the resale right and repeated resale, these dealers prevent successful artists, whom they should be proud of representing, from reaping the financial rewards that the droit de suite scheme would create. Conclusion This paper has revisited the debate on the copyright law provision of the resale right, which has been sustained by repetitive arguments in the US and Europe. By drawing on the recently released empirical data to analyze sales records of public auctions specifically related to the droit-de-suite-eligible segment of the art markets, the paper has cast doubt on the argument that the resale right will benefit only a limited number of elite, established artists while doing a disservice to the majority of the profession. It has shown that while resale right payments may be concentrated on established artists (and their successors in title) in value terms, small amounts will be paid to a large number of artists who are not among the top list, particularly in the European market where lower value transactions are frequent. Although determining whether the benefits outweigh the costs of legislating and enforcing a right of this kind (e.g., a fall in initial prices) or not is beyond the scope of this study, it has presented an empirical argument that brings the debate into a new light. By drawing on the available, but scant, non-economic literature that sheds light on the pricing strategies of art dealers in the primary market, the paper has also attempted to advance our understanding about the effects of the resale right. The paper has suggested that the ‘inherent International Journal of Cultural Policy 311 Downloaded By: [Doshisha University] At: 13:19 14 August 2008 value’ and ‘inter-temporal unfairness’ theories of the resale right may have some value, rationales which have not even taken seriously in the debate. Analysis of the impact on art dealers has suggested a complexity of, and conflicts between, different economic forces that the dealers would confront. To more adequately estimate the effects of the resale right on the art market, it would be necessary to delve into the interaction between the primary and secondary markets. While Solow (1998) has made an interesting contribution to this research area by exploring the possible impact of the resale right on the artist’s current production, questions remain as to the effect of the right on the value of the artist’s portfolio as well as on the decisions of the artist and collectors to release works into the market. The non-availability of transaction records in the art trade outside major auction houses continues to pose a serious problem to research. However, at least a theoretical model might be considered to establish the relationship between the prices of earlier works of an artist publicly posted in auctions and the prices of current works of the same artist in the primary market. Acknowledgements This paper benefited from comments and suggestions made by Olav Velthuis, Takeo Hoshi, Bruno Frey and David Throsby on its earlier versions. I thank these researchers and two anonymous reviewers for their thoughtful and helpful reading. Notes 1. Directive 2001/84/EC of the European Parliament and of the Council of 27 September 2001 on the Resale Right for the Benefit of the Author of an Original Work of Art (OJ L 272/32, 2001). 2. The art dealer may be the first buyer, but in most cases, the dealer takes art works on consignment and promotes them to potential collectors. 3. Purchasers tend to be more capable of spreading the risk, hence the unwaivability works to the artist’s disadvantage (Bolch et al. 1978, pp. 695–698). 4. For example, the major objective and rationale for the EC Directive is to smooth out the disparity 5. 6. 7. 8. 9. of the market in Europe, although Recital (3) of the Directive refers to the lack of balance between visual artists and other creators in copyright law. Copyright law in common law tradition is generally characterized as utilitarian, i.e. giving incentives for creative works and broadening public access to the works, whereas law in civil law countries tends to have more emphasis on authorship and the protection of authors. They include Robert Rauschenberg, William de Kooning, Alexander Calder, Jasper Johns, and Frank Stella (Camp 1980, p. 153). In theory, a first sale in a public auction covered in the studies (i.e. an artist bringing his/her work to the auction) is possible, but is highly unlikely in practice and negligible in frequency. The data comes from the Art Sales Index, which routinely covers the auction catalogues of 1,259 auctions houses in 47 countries (Kusin & Co. 2005, pp. 9–10). The works of non-EU artists sold in the European art market are included in Kusin. The UK has chosen to protect nationals of the European Economic Area and a number of countries listed in Schedule 2 of the Statutory Instruments, excluding the US. The inclusion/exclusion of the nationals is based on the reciprocity principle between the EU Member States and third countries (Article 7[1]). Thus, the figures related to the UK in Table 1 are probably overestimated (Graddy and Szymanski [2005], p. 7). However, the estimates may not be excessive, because ‘American painters seldom appear at auctions in Europe’ according to Ginsburgh and Jeanfils (1995, p. 543) who studied the sale records of Sotheby’s and Christie’s New York from 1962 to 1991. The EU Directive does not apply to many areas of cutting-edge contemporary practice of ‘fine art’, because of their transitory, intangible nature. Examples include Land Art, Video Art, and Performance Art, while photographers as fine artists are protected by the Directive although they, together with commercial/journalistic photographers, are classified as ‘audio-visual operators’ in the LFS. 312 N. Kawashima 10. But see Rengers and Velthuis (2002) for an exceptional study on the primary art market in the Netherlands. 11. The introduction of the droit de suite in the Federal Republic of Germany in 1965 was not without 12. 13. 14. Downloaded By: [Doshisha University] At: 13:19 14 August 2008 15. 16. opposition from art dealers and enforcement problems, which led to the amendment in 1976 (Samson 1973, Nordemann 1977). In Germany, thus, it was long considered that the profit participation should prevail despite its relative impracticality (Katzenberger 1973, p. 367). Although difficult to accommodate in the Anglo-American conception, provisions to correct such inter-temporal inequity in fact exist in German and French copyright laws (see Cornish 2002). The same can be seen in the practice of auctioning. The starting price is carefully determined by the auctioneer to suggest the high quality of the work, which however should not be too high to deter any bidding. Unsold items (because the highest bid was lower than the ‘reserve’ price of the seller below which the seller will not part with the item) are sometimes denied access to another auction until some time lapses, presumably because their values are harmed (called ‘burned’ in the industry parlance) (Ashenfelter 2003). Velthuis (2004, pp. 378–82) distinguishes his ‘interpretive approach to prices’ from the ‘Veblen effect’ and the ‘wage rigidity’ theories advanced by such economists as Keynes, Solow, Akerlof, and Stiglitz. 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