The Surreal Economics of the Contemporary-Art Market

Yet even as he’s become a connoisseur, Prendergast has continued to puzzle over the mechanics of the contemporary-art market, which are unlike any he has encountered. The market has become more sophisticated and international, involving not just sellers and buyers but also global teams of advisors at both big banks and boutique outlets. Art is considered an alternative financial asset, much like cryptocurrencies, commodities, collectibles, or land—but with more cachet. It’s like a cool hobby that can be lucrative too. Many investors purchase art and then store it for significant sums, often in Switzerland for tax purposes. Art investment funds have popped up (and fizzled out), and some banks and private lenders will let owners borrow against the value of their art.

But contemporary-art prices often don’t reflect either quality or the amount customers are willing to pay. The value of an item depends in part on what its creator goes on to do next, making art more like architecture or fashion than a typical financial asset. Reselling a work is extremely difficult, and the secondary market is baffling: The same piece of art can command $150,000 in a gallery but sell at an auction for $30,000. And some of the market’s quirks keep all but superstar artists from earning a living and prevent meaningful art from being widely seen and appreciated.

Brands as arbiters of quality

One of the first oddities Prendergast noticed is that he isn’t alone in struggling to understand how much contemporary-art pieces are worth. Even experienced collectors often can’t confidently assess quality. Much of the art is abstract or conceptual, and its visual appeal is subjective. Artworks are often easy to copy, and understanding whether one is innovative requires deep knowledge of art history.

“It’s like somebody who shows up at an academic seminar and has no idea what’s going on, or someone who goes to a contemporary-dance performance with no background understanding,” he says. “You need to know all the ideas that came before.”

When buying a new kind of toothpaste or even a car, consumers usually know whether they like the item once they try it. Not so for contemporary art—a collector can hang a piece on the wall and still wonder if it’s good. There are no product reviews or independent advisors to help, and no warranties or return policies if you make a mistake. As a result, Prendergast writes, “buying art is like throwing darts at a dartboard.”

To compensate for their ignorance, buyers end up relying on two brand names to assess quality: the gallery and the artist. Galleries represent artists and usually have the exclusive right to sell their work in a certain area. They set prices and typically keep half of sales revenue. Although it’s easy enough to open an exhibition space, it’s hard to stand out. There’s a strict and stable hierarchy, with the top galleries attracting choice collectors as well as artists who can command higher prices. Gallerists are not objective sources of information, and yet their advice and imprimatur is often the main signifier that a work is valuable. Prendergast can’t think of any other market in which gatekeepers play a similar role.

Collectors also consider the artist’s brand, assuming—not always accurately—that if a previous piece was considered valuable, another will be too. We usually don’t judge the quality of a movie by a director’s past or future films, Prendergast notes, but this approach is normal for contemporary art. The value of a piece you buy today will depend on what the artist makes in the coming decades. “As a result,” he writes, “for many collectors, buying an artwork is akin to buying an equity stake in an artist.”

Prices that are too high or too low

Economists think about prices as tethered to supply and demand: If someone is willing to pay the requested price, they get the item. But in the contemporary-art market, prices follow a different logic, Prendergast says.

Galleries often price pieces well above what market forces dictate—what they think the market should pay rather than what it will pay. One reason, Prendergast observes, is that they’re targeting the rare buyers willing to pay those high sums. This tendency has accelerated in the past 15 years, as galleries have begun catering to the growing ranks of the superrich. Because few people are willing to pay such prices, many works by all but the highest tier of artists end up going for a steep discount if they’re resold at auction. Another reason galleries inflate prices is that they hope buyers will interpret this as an indicator of quality, raising the cachet of their artists. (Prendergast likens this to shopping for a surgeon—you wouldn’t want one charging bargain-basement rates.)

But for young artists who are in demand and seen as up-and-comers, galleries often set prices that are lower than what the market can tolerate, keeping many would-be buyers from getting hold of their work, Prendergast notes. They underprice in order to get the art into desirable collections or museums as an investment in the artists’ long-term brand. And galleries are almost never willing to reduce prices, as this can suggest a decline in quality, so they may choose to start on the low end at the outset of an uncertain career.

There’s another reason prices don’t always correlate with objective artistic quality: There is no such thing. Instead, they reflect the tastes of collectors. For example, Prendergast notes, collectors tend to prefer paintings over conceptual pieces, so the former generally sell for more. Collectors are also willing to pay for status, so they may shell out more for artists or works that are in vogue rather than those that are more innovative.

A risky investment

Most physical assets we buy—such as houses, cars, or furniture—can easily be resold. Yet that’s not the case for most contemporary art. Superstar artists and young hotshots can yield eye-popping sums at auction, but for the other 80 percent or more of the field, there is no effective way for collectors to offload pieces at prices close to what they paid. A mid-career artist whose work goes for $80,000 at a gallery might fetch $4,000 at auction. A gallery will be reluctant to acknowledge the falling prices so may insist on listing it at an unrealistic price. The absence of a functioning secondary market is “one of the most startling aspects of this marketplace,” Prendergast writes. “If they [collectors] make a mistake, they are likely stuck with the work.”

That’s one reason Prendergast believes investing in contemporary art is a risky proposition for most people. Collectors usually aren’t well equipped to evaluate a piece’s quality, and no one can predict how an artist’s future career will affect the work’s value. While trading on insider information is illegal when it comes to stocks, it’s business as usual in art investing. “The well connected get information earlier than the rest of us, and the uninformed pick up the scraps,” Prendergast writes. He compares buying contemporary art to investing in startups: While most purchases yield no returns, for the lucky few collectors, a tiny sliver of them lead to a major payday.

Indeed, New York University’s Amy Whitaker and City St. George’s, University of London’s Roman Kräussl make this connection explicitly. They obtained data from the time of an artwork’s creation to its purchase for 390 works in a private collection that was owned by Emily Hall Tremaine and Burton G. Tremaine Sr. Using this information, the researchers built a model of collectors as venture-stage investors. “We find distinct patterns of early acquisition, the strategic management of museum partnerships, and a portfolio management strategy of donating both low-value and high-value works,” they write.

They find that the collectors, like many VCs, took risks—nearly 70 percent of the works in the sample were purchased within a year of being made. (See “How art collecting mirrors venture investing,” facing page.) The collectors also took steps to improve the reputation of their investments, such as through a show that helped build the value of the artworks displayed. They also rebalanced their investments, using a strategy that allowed them to sidestep some of the inefficiencies of the secondary market by donating artworks to museums and taking a tax deduction on the primary-market price.

Just as early-stage investing is typically done by professionals, most people should avoid treating contemporary art as a financial investment unless they are “incredibly well-informed,” Prendergast advises, adding that those who want to make a purchase should wait a year after they begin looking to learn the landscape. “Investing blind is a really bad idea,” he says.

A tale of two markets

A Willem de Kooning painting sold for $300 million a decade ago. Four years later, a Jeff Koons rabbit sculpture fetched $91 million. Andy Warhol’s depiction of Marilyn Monroe went for nearly $200 million in 2022. Splashy headlines about record-breaking sums paid at auction leave an impression; yet among living contemporary artists, superstars who can command prices anywhere near those are the exception, not the norm. According to The 2024 Contemporary Art Market Report from Artprice, most contemporary art pieces sold for less than $5,000 in that financial year.

The divide is deepening, Prendergast argues: Increasingly, a greater share of contemporary-art spending is flowing to a smaller cohort of artists. These are either hotshots who are household names or buzzy young artists whom collectors are treating as “lottery tickets” that they hope will pay off as the artists’ careers ascend. This move toward a “winner takes all” dynamic has been fueled partly by the globalization of the contemporary-art market, Prendergast says. With more buyers crossing national borders, particularly overseas collectors purchasing in the United States, funds are concentrating on fewer and fewer well-known names. For example, Prendergast is aware of one small gallery owner in Chicago who had multiple requests from international collectors seeking to buy an up-and-comer’s pieces, sight unseen, after a famous artist lauded the work.

This bifurcation of the market accelerated during the pandemic, Prendergast says. Stuck at home, people started spending more money on anything they could buy online, including contemporary art. At the same time, more buyers were perusing art on social media rather than in galleries, paving the way for a lucky few artists to go viral while most fell off the radar. These dynamics have outlasted lockdowns and further stoked a herd mentality in which people flock to a small number of famous and trendy artists. As a result, many highly respected, often midcareer artists struggle to earn a living. “Most people wouldn’t believe the number of artists, middle-aged people with lots of museum shows, who are holding second jobs just to pay the bills,” Prendergast says.

‘The ultimate luxury good’

Another imbalance he observes relates to who gets access to contemporary art. Because there isn’t a functional secondary market for collectors, many of whom have shelled out richly for their pieces and don’t want to sell them for a song, many works end up in elite private collections or in storage—where they’re seen by the rarified few or not at all. “It is hard to think of any other cultural endeavor whose market has such little reach outside the richest slice of society,” Prendergast writes.

To be sure, elites have long commissioned and funded art for themselves. But they have done so, too, for other forms of culture—such as dance, music, and theater—and those have become more accessible over time. Prendergast wishes it were the same for contemporary art.

He argues that the continuing exclusivity of contemporary art carries a social penalty, more so than for other expensive items. “I have absolutely no problem with Rolex watches being luxury goods because I don’t think they tell us anything about the world in a cultural sense,” he says. “But a lot of artists are saying really interesting things about the world, and sometimes pieces of culture really can have an impact on society at large.” Prendergast believes there’s a missed opportunity when their message isn’t shared.

Several years ago, he commissioned Wolfgang Tillmans, a renowned experimental German photographer, to create four prints for the Booth art collection. The photographs were set to be displayed at Booth’s Hyde Park campus in Chicago, which is open to all University of Chicago students, faculty, and staff, as well as the public. When Tillman arrived to supervise installation, Prendergast was surprised to see his glee. “He was ecstatic when he noticed that hundreds of people would be looking at his work every day,” he says. “And he’s one of the most esteemed photographers of our generation.”

As galleries have stepped up their focus on superrich buyers, that has pushed prices up even further and affected museums, an important avenue for public access. “Most museums rely on donors to provide funds, or for those donors to make gifts of art in order to build their collections,” says Michael Darling, former chief curator at the Museum of Contemporary Art Chicago and cofounder of Museum Exchange, a digital platform that facilitates art donations. “The increased value of contemporary art has made it very difficult for museums to keep up.”

A more equitable future

One reform Prendergast recommends is for reliable information about art values and quality to be shared by sources that don’t have a financial stake in purchases. He notes that while galleries have become more transparent about pricing since online sales have grown, and sales information from the secondary market is tracked and analyzed, no one has aggregated primary-market data into a usable form. Greater transparency would empower less-wealthy collectors and institutions to purchase art that is more likely to be seen by the public, he argues.

Galleries may also need to rethink prioritizing the ultrarich after having inflated prices, particularly during the pandemic, to capture the interest of the überwealthy. “When there is a market downturn, like we are seeing now, there is just not enough money flowing into the system to keep all of these galleries afloat,” says Darling.

Many superrich collectors have walked away, perhaps realizing that contemporary art is not a reliable investment opportunity, and yet galleries still avoid dropping prices because of the fallout to their artists’ reputations. As a result, the contemporary-art market is both overheated and in the midst of a slump, Prendergast says. Galleries could address the disconnect by making contemporary art more attainable, but he isn’t holding his breath that they’re willing to do so. In the meantime, others sense a buying opportunity in the downturn. (See “Is Art a Good Investment?”)

Newer technologies have also begun to change art-world dynamics. Chief among these is the rise of non-fungible tokens, which certify ownership of digital assets, including art, and are recorded on a blockchain. While Prendergast isn’t a fan of most NFT art he has seen, he says NFTs could challenge the powerful position of gallerists by validating authenticity and quality. “It’s an attempt to create a form of art that’s more democratic rather than being filtered through the eyes of experts,” he acknowledges.

Different economic models could also play a role. Cameron Rowland, an American conceptual artist known for their work on social injustice and race, sells just one-third of their pieces; another third are rented and can never be sold, while the remaining circulation takes the form of extended loans or other creative arrangements.

Rowland’s approach challenges “predominant relations of exchange, capital accumulation, ownership, and racialized disposession that rely on property law,” artist and curator Eric Golo Stone writes in an essay in the academic journal October. Renting out work can “regulate, and potentially resist, the process of accumulation, which the art market has increasingly accelerated,” he argues.

At the same time, this resistance could be interpreted as a restriction of supply that only makes the artist and their pieces more desirable to collectors. That could work in the favor of Rowland’s gallery, whose representative declined to comment. Prendergast predicts that Rowland’s pieces in the Booth collection will end up gaining value and reaching the upper echelon of prices. “In an odd way, it’s part of their art,” says Prendergast. The work becomes an unattainable good in an opaque market that loves luxury.