How to Deal with Fakes in the Art Market? A Theoretical Model Exploring Labeling and Price-Setting Strategies at Auction

In this paper, we explore labeling strategies in markets trading credence goods and characterized by asymmetric information. Using the art market as a specific case study, we focus on labeling and pricesetting strategies behind autograph (A) and non-autograph artworks (NA). Non-autograph artworks (i.e., whose authorship is not properly identified) represent a significant proportion of credence goods put up for sale at auction. In this paper, we build a theoretical model to better understand the intermediaries’ labeling and pricing strategies and to provide elements of a response to the following question: What are the auction houses’ incentives or constraints to opt for one label over another (A/NA)? Focusing on the lower-end of the art market, where uncertainty is greater and misattributions more likely to occur, our theoretical model considers a set of exogenous and endogenous forces suspected to explain the correlation between the choice of a particular labeling strategy and the final price (e.g., quality, research costs, etc.). Assuming that the price of A works is higher than that of NA works, the main outcome of our model suggests that using the most honest label and information regarding a work’s actual nature might be the more profitable strategy for the intermediary, even in the low-end market, but only under certain conditions. The only condition for mislabeling an artwork is the high costs required to verify its quality. When no research is conducted to assess the work’s quality, the resulting uncertainty generates an endogenous price cap for autograph artworks. This paper has direct implications for art market players as it relates to optimal labeling treatment strategy and reputation in the low-end art market