Economics of visual art defies many principles of economics while also relying on them. This makes economics of art a creative and political practice unto itself. The big question in the field is whether economics can explain art – encapsulated economic value – or whether it cannot but is still a useful tool for structurally supporting art. Under the Nothing But argument, all value, including artistic value, can be represented by price. Under the Hostile Worlds argument, art can never be fully described by markets and should be kept separate. We find that economics and art are highly related in systems of institutional and commercial value. Our starting point for the book is looking at artists who make things.

Pricing in the arts is peculiar and opaque. Pricing for works of art is very different from pricing for museum tickets and other interchangeable goods. We consider price elasticity of demand, meaning customer sensitivity to a change in price, especially considering a ticket-pricing change at the Indianapolis Museum of Art. We consider price discrimination, the strategy of charging different prices to different groups of people. We consider other variations on pricing structure including bundling, two-part tariffs, and versioning. For pricing works of art, the method of pricing is, following from Velthuis’s work, largely sociological and best modeled as a set of scripts.

In this chapter we revisit both art and economics as defined categories. The art world itself operates as a system of institutional and commercial value and of complicated interplays of altruism, strategy, financial motivation, and artistic import. This system exists within a larger system. That is, the art world is part of the larger world. We explore the definition of art – the narrowness of the definition of "high art" and the breadth of creative and visual activity. We consider the process by which visual culture is legitimated into the category of art, and then ask whether broad access to art is economic – a chance to buy something – or civic – a chance to participate. In fact, economics itself is a creative discipline. George Akerlof, the Nobel laureate, recently wrote about economics’ "sins of omission" as a discipline. These omissions are in overlooking soft skills and lacking the ability to tackle complex interdisciplinary problems. Thus, we leave the book with an idea of economics as a set of tools to create sustainability in the arts and economics as a creative discipline to build the world as an art project.

Markets are intersections of buyers and sellers brought together to exchange goods and services most efficiently, so the theory goes. In fact, markets are also connected to barter and exchange and to their underlying value: resourcefulness. We look at Nina Katchadourian and her artwork made on airplanes ("Seat Assignment") as an example of resourcefulness, Caroline Woolard’s Work Dress as an example of barter, and Elizabeth Cleland’s exhibition as an example of equivalencies created by markets. We introduce supply and demand, how the graphs are constructed, and how to think about shifts in supply and demand.

If the logic of markets is that price equals value, sometimes there are forms of value that fall outside of what markets are able to recognize. We call this phenomenon market failure. It is not a personal or institutional failure or even a failure of economic theory, just a limitation of markets as a medium. Our core case study is of the opening of Tate Modern. The museum revitalized the Southwark area of London and increased property values sometimes 500%. The museum relied on philanthropy and government support and was not able to capture all of the value it created. We consider two very different methods economists use to evaluate these situations: contingent valuation method and economic development study. We compare and contrast the approaches taken by the Guggenheim and the Tate. We explore concepts of market failure including public goods, externalities, tragedy of the commons, free-rider problems, adverse selection, and moral hazard.

In this chapter we consider supply chains, meaning the sequence of markets in an industry. For example, when the artist Damien Hirst hosted an auction of his own work at Sotheby’s London in 2008, he bypassed his dealers, leapfrogging over a stage of the typical supply chain. Supply chains are also sometimes vertically integrated markets, meaning the same firm owns many stages of these sequential markets. Vertical integration is the process by which a firm enters into the business area of its supplier or its customer, via acquisition, competition, or long-term contract. Vertical market power is often motivated by power or avoidance of different forms of market failure. Here, we are not (as in Chapter 4) talking about failure of the alignment of price and value but failure to transact reliably and without risk or undue cost. We explore related concepts of asset specificity and then business strategy models that take the supply chain as their spine.

If economics focuses on price representing value, we now shift to finance, which focuses on the connection of risk and return. We begin with the story of Wynn Kramarsky, a collector of works on paper (with his wife Sarah-Ann). Kramarsky’s parents had also owned Vincent van Gogh’s Portrait of Dr. Gachet. We go through a market primer including terminology of asset allocation and the logic of discounting cash flows and performing net present value analysis. We then review art market studies that use repeat sales and hedonic regression methods. The questions of this chapter try to connect the ephemeral, risk-taking, deeply uncertain work that happens in artists’ studios and to track the artwork from there to its status as part of an asset class.