The basic idea of considering substitutes as threats for fine artists’ chances of earning a living is the following: The potential for a fine artist to make a living in the arts is determined by the prices that art buyers and consumers in the broadest sense are willing to pay for the created artworks. This depends primarily on their individually perceived or expected consumption values, as defined in Appendix A, as well as on the availability and consumption values of substitutes. It can basically be assumed that the higher the consumption value of original artworks and the lower the availability of substitute products the lower the overall threat to substitute these artworks will be. In this context, it can further be assumed that the consumption value of original artworks is significantly higher than the value of duplicates (Newman and Bloom, 2011). Where there are no or only few substitutes for the offered artworks, art buyers are usually comparatively insensitive to price. Stated in more economic terms, art buyers’ demand is inelastic with respect to price. In contrast, if there are close substitutes for artworks, then attempts by fine artists to raise prices cause potential art buyers to switch to substitutes. In this case, demand is elastic with respect to price (e.g. Porter, 1980, 2000, 2008a, 2008b; Heilbrun and Gray, 2001; Abbing, 2002; Prendergast, 2014; Ardizzone and Zorloni, 2014).
84 3.2.1.1.2 Key Characteristics of Artworks
Resch (2011) examines the key characteristics of artworks by comparing them with the specifications of the highly standardised and regulated products on the international stock markets in order to show their uniqueness.
Original artworks, such as paintings, drawings, sculptures, and photographs, exhibit specific characteristics different from other goods like stocks. In principal, every artwork is the unique output of an artist’s individual creativity (Gérard-Varet, 1995; Codignola, 2003). This output is definitely limited, particularly for artists who have passed away. The uniqueness and relatively small amount of artworks per artist is one of the key differences to commodities like stocks (Resch, 2011). From a production point of view, the artwork of every individual artist could therefore be considered an asset with a tendency of increasing prices over time when demand could be concentrated on this limited output (Codignola, 2003). While commodities like stocks are standardised products whose quality is known and can be assessed during a purchase and easily substituted, unique artworks of the same theme by the same artist are and remain unique, not standardised works and basically unable to be substituted in their originality (Gérard-Varet, 1995; Codignola, 2003). Considering this specific characteristic, it can be concluded that unique artworks are not substituted in terms of their originality by other products and artworks, especially not for art buyers who are either primarily motivated in purchasing the unique output of a particular artist (collectors) or in finding aesthetically and/or emotionally appealing art quality.
However, according to Boll (2011) the quality and value of unknown artists’ works can be fairly evaluated neither before nor even after the purchase without any specialists, which is why Boll (2011, p. 35) classifies them as “credence goods”. He claims that only brand building, meaning developing a market reputation, can be helpful for artists establishing identity, value, and trust in their work and in the whole system. Brands create a reliable quality that is evaluable by art buyers before the purchase. Brands also help to ‘transform’ artworks from credence goods to so-called experience goods (Pine II and Gilmore, 1999, 2011; Dewey, 2005; Boll, 2011). To achieve this, Boll (2011) and Codignola (2003) stress that opinions and evaluations from specialists, like galleries and reputable collectors, are definitely needed (Boll, 2011; Abbing, 2002). In turn, already
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established artists with high-quality brands benefit from high prices paid by collectors and buyers who consider art also to be investments (Boll, 2011; Deloitte and ArtTactic, 2016). To sum up at this point, artworks of unknown artists usually suffer from a missing evaluation of their quality. The consumption value of these artworks is therefore expected to be considerably lower than for artworks of established and (well-)known artists with developed brands. The threat to substitute artworks of unknown artists seems to be therefore relatively high.
Specialists Bénédicte (2007) and Tamar (2010) conclude in this context that the qualification of artists and their work is highly dependent on artists’ active participation in the marketplace (Tamar, 2010), for example, by passing specific artistic tests, such as access to exhibitions, securing grants, and the sale of artwork (Bénédicte, 2007). Once the artistic tests have been passed, the artist’s works are considered of higher quality, less substitutable and therefore appropriate for being visible on the market (Bénédicte, 2007). This means that artworks of more established and more famous artists with higher market reputations and consumption values are expected to be more protected against the threat of substitution, at least by less established artists with lower developed brands and consumption values. However, artworks of artists with a similar market reputation and consumption value are also easily substitutable. It only depends on the consumers’ individual and subjective tastes.
Frey and Pommerehne (1988) see another difference between artworks and other products like stocks in their importance for humans’ cultural development which makes artworks products of public interest in their view. Some researchers classify artworks as a mixture of consumer goods, cultural goods, and financial assets (among others, Stein, 1977, Grampp, 1989; Herchenröder, 1999; Codignola, 2003; Bernhard, 2005; di Torcello, 2009; Bocart and Hafner, 2011). In Bernhard’s view, artworks provide not only consumption benefits to their buyers through their emotional influence in loving to collect and own art, but also artworks are beneficial for the cultural development and entertainment of a society (see section 3.2.2.3) as well as a hedge against inflation (Throsby, 1994) and crises on the international capital markets (Thurnhofer, 2014). Thurnhofer particularly confirms well-known artworks’ function of artists of the Olympus, art market’s top segment, as value-guaranteed investments as well as a specific
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“segment of the financial market” that, however, is less volatile compared to the international stock market (Thurnhofer, 2014, p. 50).
3.2.1.1.3 Conclusion
To sum up the economically applicable rules, the extent to which the threat of substitutes constrains fine artists’ income depends on at least four factors:
1. The price-performance characteristics (consumption value) of substitutes. The willingness of art buyers to switch between substitutes in response to price changes depends upon their relative performance or benefit in relation to price (consumption value).
2. The specific characteristics of artworks. Artworks show very specific functions and various price-performance characteristics (consumption values) for art buyers and art consumers in the broadest sense.
3. The propensity of art buyers to substitute. The critical issue is the willingness to substitute: even though substitutes exist, art buyers may be unresponsive to changes in relative prices.
4. The availability of substitute products. The threat to substitute fine artworks also depends on the availability and consumption values of alternative products.
Consequently, it can be summarised and concluded that the threat to substitute original artworks is basically relatively high for emerging artists due a high availability of substitute products that have similar and higher consumption values than their works. In this context, emerging artists in particular face the additional threat that their original artworks are substituted by daily-life, non-arts products, since artworks of unknown, not yet established artists “do not contribute to providing the basic sustenance of life” (Phillips, 2010, p. 261). The willingness to buy art instead of daily-life products of first- time or casual art buyers depends on their given financial art budgets (Throsby, 1994). Potential art buyers with relatively low art budgets are assumed to be more reluctant to invest in art when the need of other products is relatively high or, to put it in other words, when the consumption value of daily-life products is considered higher compared to artworks. Artists’ real protection against substitution is only given in their specific market reputation and developed consumption value, experienced or expected by art buyers.
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The higher the expected or experienced consumption value the lower the threat of substitution.
Considering these two additional characteristics of artworks, it can further be assumed that the impact of works of established artists have an important cultural influence on society’s development. As part of society’s culture, fine artworks can also be substituted by other mediums of art such as performing arts, literature, movies, or music. Although they may not be direct substitutes for fine arts, they may provide similar consumption values in culturally developing and entertaining society. In this context, it can be assumed that the prices of contemporary fine artworks of established and famous artists are set higher than those for music, movies, literature, or performing arts. Thus, it can also be assumed that the threat to substitute fine arts by other art mediums for the cultural development and entertainment of a society is at a mid to high level.
Additionally, fine artworks in the asset and investment class basically compete with other asset classes and are therefore relatively substitutable. However, the threat to substitute artworks of a particular artist who developed a very high market reputation and consumption value as an asset and investment is relatively low due to its originality and low availability.