Social Dynamics of Price Formation in the Art Market

The current paper employs a macro organization theory perspective to explain one of the most representative market phenomena; i.e. price formation. Specifically, we empirically examine the effects of a social variable frequently studied in the organization theory literature – i.e. status - as a signal on the price formation of cultural products the qualities of which are hard to ascertain in advance, using an original data-set of fine art auctions. We predict that when there is a high level of uncertainty about the quality of a product, the market performance of the product will be affected significantly by social factors that may serve as quality signals, such as the status position of its producer. However, we predict that status among lay consumers and status among professional experts will have different signaling effects on price formation in markets. According to the results of our empirical study that analyzed the records of all the artworks traded at a major Korean auction company, 1998-2007, the price of an artwork sold at an auction as a market performance was found to be affected positively by the market status of the artist. We also found that high market status reduces the negative effect of professional status on prices. General implications are discussed.