Can Sotheby’s and Christie’s Get Out of Their Fix?

In general, you would think, the Justice Department should not be susceptible to maneuvers that come straight out of Public Relations 101. So it’ll be interesting to see whether the resignations yesterday of the CEO and chairman auction house Sotheby’s will have any effect on the widening inquiry into possible price-fixing on the part of Sotheby’s and Christie’s. The resignations make little sense except as a message that Sotheby’s is cleaning house and sacrificing those who ran the company when the collusion supposedly took place. Of course, in some sense, you might also see that as an admission of guilt, since if Sotheby’s did nothing wrong, why would anyone be stepping down? But given the fact that the inquiry could lead to criminal charges, heavy fines, and costly class-action damages, Sotheby’s is clearly anxious to do everything it can to palliate prosecutors, customers, and angry shareholders.

The collusion case started to gather steam when Christie’s went to federal prosecutors and traded information in exchange for promises of leniency and perhaps immunity. And from the outside, at least, the case looks very good. In 1992, Sotheby’s raised its commissions for buyers by 50 percent on the first $50,000 of a purchase price. Instead of aggressively using its newfound price advantage to take business away from Sotheby’s, Christie’s simply matched the increase exactly weeks later. Three years later, Christie’s replaced its traditional practice of bargaining with sellers over their commissions, a practice that lent itself to price-cutting and competition, with a sliding scale of prices that were non-negotiable. Within weeks, Sotheby’s instituted the same scale, again forgoing the competitive advantage it would otherwise have had.

Technically speaking, price-fixing does require actual collusion, which prosecutors would presumably have evidence of before bringing charges. But given the two different sequences of events, it’s difficult to believe that the two companies would have raised prices as sharply as they did without some sense that they wouldn’t be facing any price competition as a result. The traditional problem with price-fixing, especially in the case of cartels, is the problem of cheating. But that’s only a real problem when it’s difficult to keep track of what everyone involved is doing. In the case of Sotheby’s and Christie’s, which together control 95 percent of the high-end auction market, the monitoring process would have been much easier. And since there’s almost nowhere else for would-be buyers and sellers to take their business, the companies had nothing to fear from outside competition. The only real cost of raising prices was losing business at the margins, but there aren’t many people buying paintings at Sotheby’s who won’t make a purchase because the commission is now 15 percent rather than 10 percent.

It is true that similar prices don’t necessarily reflect price collusion. Most gas stations in a given area have very similar prices, and recent studies suggest that gas-station owners avoid price wars because they assume that their competitors will match any price cuts, with the inevitable result that everyone will end up poorer. And it may also be true–though here what’s actually going on seems sketchier–that investment banks all charge the exact same commissions to take companies public because, as they would argue, companies are not shopping based on price. But what’s obviously striking about the Sotheby’s case is that what’s at issue are essentially unprovoked price increases in an oligopolistic market. If every investment bank on Wall Street suddenly started charging 10 percent to take companies public, that’d probably draw Justice’s attention.

There is an interesting question at the core of all this, which is: Why is collusion illegal? After all, why should the state be able to tell Sotheby’s and Christie’s what prices they can or can’t charge? The right answer to this question is not that society has an interest in making sure that consumers are paying “fair” prices, exactly. It’s rather that society has an interest in making sure markets remain competitive, since the virtues of markets can only exist when competition does. The question isn’t really about fair vs. unfair, but rather market-determined versus collusively imposed. Of course, there is no hard and fast rule here, since most successful companies have some measure of market power, which means they have some control over the price they can charge. But it’s the sources of that market power that make all the difference from an antitrust perspective. If you charge more because your product is unique, or of a higher quality, or more interestingly designed, more power, so to speak, to you. But if you charge more–without any additional benefit to consumers–because there’s nowhere else for your customers to go, that’s when Justice should, and does, come running.