What Makes A Great Work Of Art Worth $119 Million?

Edvard Munch's famous painting, The Scream, just sold for almost $120 million at auction. It was the highest price paid for a work of art in history. The proceeds from the sale will be used to develop an art museum and hotel in Munch's home town in Norway. The identity of the purchaser was not revealed, but the seller's comments about making the painting more available to the public implies that it was sold to a museum.

The price of the painting was determined by market forces. The supply of the painting is fixed at a unit of one. It is the only painting of The Scream in private hands, and it is the only copy of the painting with written comments by Munch on the frame. Therefore, the price was determined entirely by the market demand for the painting. The number of potential buyers was limited by the starting price of $40 million, and the number of bidders fell to two just prior to the sale. In economic speak, the implication is that the perceived utility to the purchaser was exceptionally high. We have no understanding, however, of the factors that contributed to the utility. It is simply a revealed preference, that is determined after the fact.

I often use examples like this from the art market to illustrate that we know very little about utility. It also demonstrates the effect of a limited supply on prices. The market for works of art, antiques and other rare things, is rather unique.