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In Defense of Sotheby's

December 17, 2001

Government lawyers have another scalp for their belts.  A. Alfred Taubman, the 76-year-old CEO of the Sotheby's auction house, has been convicted of price fixing in federal court in New York City and now faces time in prison.  Legitimate businesses find themselves in crisis, and it will be more difficult to auction items in the future.  In short, it is just another day at the office for those who further the Leviathan State.

In the end, it probably was not difficult for prosecutors to obtain a guilty verdict for Taubman.  Witness after witness--people trying to stay out of jail themselves--told the jury that Taubman had conspired with the top brass at Christie's, the other well-known auction house, to fix commissions.  No doubt, most of the jurors, not being wealthy people, had no problem declaring a rich man guilty of a crime.

However, as Holman W. Jenkins, Jr., so aptly pointed out this past week in his Wall Street Journal column, Taubman did not commit a crime in the conventional sense.  Granted, the political classes and their media allies (and more than a few misguided economists) have declared price fixing to be a crime against humanity, but as in so many other things, their stand is at best wrong and at worst cynically hypocritical.

Price fixing occurs when individuals from competing firms agree on what prices to charge for their products and services.  Because private price fixing is illegal in the United States, these meetings are done in private and carry potential criminal penalties if the participants are apprehended.  

However, lest one think price fixing is a shady activity, consider that governments at all levels are the primary price fixers.  From setting minimum prices (and price supports) for agricultural products to restricting entry into markets (such as taxi ownership) to conferring monopolies (cable television) and the like, governments are in the job of restricting output and raising prices to consumers.  Furthermore, all of the regulation that so many supporters of antitrust laws seem to support is also price fixing.  For example, when government "regulated" railroads, airlines, and truck transportation, it did so by restricting routes and setting minimum prices.

That government has done (and continues to do) harm to consumers through its many regulatory practices, and sweetheart deals to politically placed producers should not be in question.  Moreover, the alleged "harm" done by so-called anticompetitive practices of private business firms pales when compared to the real economic damage government does on a daily basis, yet no politicians call for economic regulators to be imprisoned.  The Sotheby's case eloquently bears that out, since it was the agents of the politicians who pursued the case.

As Jenkins has pointed out, the auction business is fiercely competitive, with very small profit margins.  Auction houses are prone to cut commissions in order to wrestle business from other auction houses, and the results are often deleterious for the houses.  Jenkins notes that high-end auction houses have high fixed costs because they have to employ large staffs of experts.  

Writes Jenkins,

These (overhead costs) bills have to be paid whether or not business is coming through the door.  That's why the guy who brings two Picassos or a dump truck full of Kennedy heirlooms has such leverage.  Losing such a sale means forgoing an opportunity to cover at least a portion of the houses' heavy fixed costs.

To protect themselves from these business realities, auction houses are tempted to make agreements with each other not to cut commissions.  Whether those agreements hold or not is another matter, since the temptation in the business world is for producers to cheat on pricing agreements.  The same problems that plague price fixing in the auction world are those that bedevil oil producers, which is why crude oil prices always seem to be heading south.

Another industry that one can compare to the auction houses is professional baseball, which is well known for paying gigantic salaries to players who become free agents.  When Peter Uberroth became commissioner of major league baseball in 1984, following his successful tenure as the organizer of the Los Angeles Olympic Games, the first thing he did was to implore baseball owners to stop paying big money to free agents.  

His plan worked--at least, for a while.  Although owners refused to admit they were colluding with one another (for fear of being charged with criminal price fixing and collusion), that seems to have been the case.  Player salaries went down, and team profits went up.  However, as time went on, owners began to leave the fold, and the competition began once again in earnest.  Today, the major-league owners are talking seriously about cutting out at least two franchises in order to cut costs.

Unlike baseball owners, who are heavily subsidized by taxpayers, who pay for the Taj Mahal stadiums, auction houses don't have the cushion given to the national pastime.  There is also another matter, that being the business of whether or not these actions actually constitute harm to anyone.

Furthermore, simply charging higher prices to individuals cannot necessarily be considered harm in the economic sense.  After all, I and most other consumers would like to have things given to us for free.  To charge any price at all would constitute harm in the eyes of antitrust advocates.  If auction houses are able to charge higher commissions, then it will also mean that the future will be better for those who sell such properties, and those who buy them.  The higher fees transferred from owners of goods to be sold to the principles of the auction houses are not money thrown into a black hole.

Jenkins notes that all those who dealt with Sotheby's did so voluntarily.  Unlike government regulation where coercion is involved, no one forced anyone to use Sotheby's or any other auction house.  To say that customers were cheated or defrauded is to do violence to the meanings of those words.  All participants knew the commision schedules and were willing to pay them.

At the turn of the twentieth century, British neoclassical economists argued about whether or not "pecuniary externalities" did harm to the economy, a pecuniary externality being the effect one economic agent might have on another.  For example, if I decide to enter a certain industry, my entry will likely result in higher costs to other producers (as I bid for the same factors of production that serve my competitors), and will also force down prices to consumers.  Economists such as Alfred Marshall and A.C. Pigou argued as to whether or not new entrants like myself should have to compensate the established producers.

In the end, the economists agreed that pecuniary externalities were normal in the course of business and could not be stopped.  The discussion of this issue was labeled the "Empty Boxes Debate," and it supposedly was the final word on this subject.

However, antitrust and other laws that spell out "economic crimes" are nothing more than the "empty boxes" being brought back to life.  While one can sway juries as to why the normal course of business is actually a crime, when one looks headlong into the arguments that economists and the political classes use to justify antitrust laws, one finds nothing more than empty opinions.

Yes, a wealthy 76-year-old man is about to be thrown into the horror that is the U.S. prison system.  The United States has one-fourth of the world's prison population, about two million of eight million prisoners worldwide.  After seeing government prosecutors congratulate each other for "winning the big one," one might just come to the conclusion that political prisoners are among our jailhouse population.


William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University.  Send him MAIL.  See his Mises.org Articles Archive. See also Trustbusters Target the Auction House by Catherine Heilman.


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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