17 July, 2019
What’s the difference between the primary and secondary market in the art market?
The primary market is a place of discovery, where the work of art sees the light of day for the very first time. In this segment of market, artists can carry out direct sales, usually by inviting collectors to their studios or sell their works through commercial galleries which set the initial sales-price levels for the artists’ market, with the main goal of broadening it.
The primary market represents the first trade of an artwork
Galleries with exclusivity agreements with artists act as the gatekeepers of the market, being artists’ official representatives, administrators, and promoters. As a result, historically, gallerists emphasized the nature of exclusivity in their relationship with artists. Nevertheless, nowadays, due to the expansion of the global art market and the related growing demand for wider visibility, the boundaries of exclusive representation have started to blur. As opposed to traditional practices, new business models allow gallerists to enter into collaborations with other galleries in order to share the costs of promoting their artists in group shows.
Infinity Mirrored Room ‘Let’s survive forever” 2017 by Yayoi Kusama. Installation view, David Zwirner New York in collaboration with Victoria Miro©
The secondary market represents all the resales, offering opportunity for higher returns
As previously mentioned, a work that has already been sold at least once, upon its resale makes its way onto the secondary market. In this respect, one of the unique features of the art market, unlike other markets, is the fact that the highest values are indeed achieved in this segment.
According to the UBS Fine Art Market Report (2019), only 8% of the dealers reported working solely in the secondary market with the lowest median turnover of $ 5.1 million as opposed to 52% of dealers working on primary market only with the lowest median turnover of $ 500,000. This is largely due to lower information costs and risks faced by the buyer. Considering its inherent scarcity and durability, art has, in fact, the potential to appreciate, maintain or even increase its value over time.
Similarly to the primary market, in the secondary market sellers offer works of art for resale individually or through agents such as private dealers or galleries. There are, however, two additional rather active and prominent players, represented by auction houses and International Art Fairs. The latter are indeed preferred by many as Art Fairs often feature in the same place hundreds of international galleries, giving collectors an immediate overview of global market trends.
Buying at public auctions, however, seems to be the winning channel for art purchases on the secondary market. The auction market has been on a steady rise for the past twenty years. The Art Basel Report (2019) confirms that sales at public auctions reached $ 29.1 billion in 2018, which illustrates a steady increase of 3% year-on-year. The growth is driven by the high-end of the market i.e. works priced over $ 10 million, with highest-priced lots in the Modern sector.
The business model currently in place is attractive for dealers, however, it is only available to a very few due to its high entry barriers. The art market, in fact, requires to be part of an exclusive network, which is often unavailable without a relevant background. Additionally, buyers often pay unreasonable premiums on top of the artwork’s market price.
In addition to the traditional trading models, in the last few years also technology has started to play a relevant role in the buying & selling process: online art sales increased by 10% year-on-year since 2013, totaling US$5.4 billion in 2017, a figure that is expected to reach up to US$8.37 billion by 2023, according to Hiscox (2018). In this scenario, a new generation of collectors is emerging and leading the trend of digitalization: 43% of art buyers bought art online in 2018, and, among them, 40% were new buyers. Online channels and mobile devices, in fact, make the purchasing process easier, reduce frictions and instill confidence in the art investment processes.
In this context, the art market is opening its frontiers towards online trading platforms which offer the opportunity to buy and sell artworks directly online. There are many marketplaces, like London Trade Art, which enable everyone to get access to an always available selection of high-quality artworks, guaranteeing transparency on the price-setting and frictionless purchases. These platforms can operate both within the primary and secondary market, collaborating either directly with the artists or with third-party galleries or collectors.
Sotheby's auctioneer Henry Wyndham at the London salesroom, February 2016. Courtesy Tristan Fewings/Getty Images.
What if the secondary market would expand through the adoption of new technologies?
Moreover, innovative trading models able to open the market to a new network of investment-oriented buyers are emerging.
In this respect, a great example could be represented by the introduction of an “art exchange”, representing an advanced electronic purchasing tool, allowing Users to buy shares of high-value artworks. This digital platform could provide the significant opportunity to monitor the evolution of prices in real time: being the level of price governed by the invisible hand of the market, the price point is set where the supply meets demand.
As argued by the main economic theories, the free market has a tendency to correct itself naturally. In this respect, digital co-ownership and regulated trading of art shares could help the art market to defeat the black market.
Also, the simultaneity of trading has a great potential for defining a new segment of the art market. The act of purchasing the artwork in a traditional way is in fact based on the assumption that, in order for the transaction to happen, a unique seller needs to meet a unique buyer, but, inevitably, the time required for that transaction to take place is detrimental to asset’s liquidity. The simultaneity of trading, instead, will allow multiple sellers to meet multiple users in the smallest fraction of time.
As previously mentioned, the global expansion of the art market will naturally adjust the existing system over time. The dominance of the Internet has already blurred geographical boundaries and re-defined the understanding of time, creating a space for tech startups to exploit the need of a new niche of high-tech buyers.
While the physical possession of an artwork may carry undesirable responsibility for buyers and put additional costs onto them, many chose to buy art without having it delivered to the door. Moreover, today lesser people feel the need to preview the art prior to their purchase. These are the factors calling out for a new niche in the market.
In this scenario, new trading models based on technology, as the art exchange, will represent on one side an innovative and alternative way to invest in art, and on the other an ally for traditional art players, providing services to all participants of the art market able to facilitate sales, make connections easier and expand the market.
In conclusion, the ever-evolving world of art is biased towards a new wave of fascinating change, living an exciting new chapter that unfold a wide host of opportunities for all the different players involved. In this context, the combination between traditional players and innovative trading models empowered by technology will undoubtedly provide benefits to all the users, allowing to overcome the traditional weaknesses of the industry, as the lack of information and transparency, bringing the entire art market to the next level.