How does a Sotheby's auction work?

Answers to your questions about the news.
May 7 2004 4:43 PM

How Does a Sotheby's Auction Work?

First, they let you touch the Renoir.

Illustration by Mark Alan Stamaty

On May 5, one of the last great private art collections went up for auction at Sotheby's, where in seven minutes of intense bidding a Rose Period Picasso became the most expensive painting ever sold at auction. The two-day sale of Impressionist and Modern art, which finished up last night, was watched by overflow crowds and brought in more than $300 million. But what were the spectators watching? What actually happens at an art auction?

In the movies, art auctions look like high-end carnival acts, with a sleazy barker/auctioneer keeping up a patter of "I have $10 million, do I hear 20?" and hapless innocents accidentally holding up paddles and bidding on works they can't remotely afford. But at Sotheby's and Christie's, the only accurate part of that image is the paddles.

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Each work (or lot) has a "reserve," which is the minimum price the owner will accept, and the auctioneer generally starts the bidding below that and moves the price up in regular increments, awarding the purchase to the highest bidder. If the final price fails to reach the reserve, the lot remains unsold. In addition to the sales price, Sotheby's charges a commission known as a "buyer's premium" of 20 percent on the first $100,000 and 12 percent on the rest. And no one can buy accidentally: Potential bidders must register beforehand (and show proof of assets, if the lot is particularly expensive). In addition, many of the most serious bidders aren't even present at the time of the auction. Museums and prominent collectors often prefer to bid anonymously by phone or leave a maximum bid with an auction house representative because a sign of their interest could drive up the price.

So why go if you can't afford to buy? Because the pre-auction viewings afford a rare opportunity to fondle great works of art. At this week's Sotheby's viewing, for example, the Picasso that sold for $104.2 million was under armed guard, but anyone could walk in off the street and touch a half-million dollars' worth of Cezanne or Renoir. This seemingly reckless indulgence is permitted by the auction houses because lots are sold "as is" and potential bidders need to be able to examine the work closely for defects that may detract from its value. Of course, for those with no interest in art, auctions offer the malicious pleasure of watching the equivalent of a small nation's GDP being traded for some colored oils on cloth.

Bonus Explainer: In 2001, Sotheby's executives were convicted of having colluded with Christie's to fix prices. Since the whole appeal of auctions is their transparency, how did the auction houses do it? By colluding on the commission paid by the seller, which is, of course, where the auction house makes its money. In a secret 1993 meeting, the two houses agreed to raise commission fees and eliminate competition over discounting, a deal that resulted in sellers being overcharged by as much as $400 million.

Bonus Bonus Explainer: The Sotheby's bidding system is known as an English auction, while Google announced last week that its initial public offering will be done through a Dutch auction. So what's the difference? In a Dutch auction, bidders get only one chance to name their price, rather than the multiple-bid "laddering" that happens with an English auction. Thus, Google shares will be allocated at the lowest price that will allow all the shares to be sold: Anyone who bid above that level will get it at that set price, while anyone who bid below it will be out of luck. This is supposed to prevent the huge run-up in price on the first day of trading that used to characterize Internet IPOs, most of which were sold using an English auction.

Sean Rocha is a former columnist for the Cairo Times and a frequent commentator on cultural and international political issues. He can be reached at laconvivencia@yahoo.com.

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