Article: “Value creation in fine arts: A system dynamics model of inverse demand and information cascades” by Philip Crossland and Faye L. Smith in Strategic Management Journal, May 2002

This article looks at information cascades in the fine arts market, specifically focusing on a company that produces porcelain sculptures of flowers and birds: Edward Marshall Boehm, Inc. Although fine art products are tangible goods, they differ from other tangible products on the market in that they also have qualities common to intangible goods, such as the expressive value of performing arts. Because these products are subject to changing social trends and creative talent, the demand of fine art products is difficult to predict.

Before purchasing artwork, it is necessary to determine its value in artistic and monetary terms. The first group to recognize the value of a work is “cognoscenti”, a group including people like museum curators. Following the cognoscenti group are two groups of customers: investors and collectors. Investors purchase artwork in order to see its monetary value appreciate, while collectors privately purchase artwork for their own pleasure. Because investors and collectors generally know less about the quality of artwork than cognoscenti, they will follow the actions of the cognoscenti group; however, these two groups will be “motivated to purchase by different information cues” from the cognoscenti.

In the “information cascade… from the cognoscenti to the investors and collectors”, both investors and collectors will follow the purchasing actions of the cognoscenti. Given their different purchasing motives, however, a “greater lag time” can be expected between the decisions of the cognoscenti and collectors than between those of the cognoscenti and investors. This article explains how there are similarities and differences between information cascade in “cultural industries” and manufacturing industries. While a cultural industry is similar to a manufacturing industry in that companies can also have a competitive advantage in the market, a company in the cultural industry achieves this by having an “inimitable” balance between artistic talent and technological process.

In class with the example of video players, we learned that it is not the technological superiority of a product that matters, but rather whether that product has been accepted by the majority of the public. This article suggests that a similar effect seems to be occuring in the fine arts market as well.