Overconfidence in the art market: a bargaining pricing model with asymmetric disinformation

This paper develops a Nash bargaining model of price formation in the art market. Agents can be naive, if they are overconfident and either overestimate artistic quality or underestimate their uncertainty of artistic quality, or sophisticated, if they correctly use all the available information. Overconfidence turns out to have a positive impact on both the price and the average quality of the artworks traded in the market. The impact of overconfidence on expected quality is weaker than the corresponding price increase, so sellers overcharge buyers. In addition, the buyer's (seller's) overconfidence has a positive (negative) impact on the likelihood of trade. If many pairs of agents may bargain simultaneously, we find that seller's market power is negatively affected by the number of sellers and positively affected by the number of buyers. If sophisticated and naive buyers coexist, naive buyers exert a negative externality on the sophisticated ones, increasing the price the latter pay.