| Abstract: |
A non-fungible token (NFT) is a uniquely identified digital asset that utilizes blockchain technology for verification of ownership and authenticity. NFTs have revolutionized the art world by providing a secure and transparent way to authenticate and trade digital artworks. In contrast to the traditional art market, a distinctive feature of the NFT market is that artists are enabled to receive royalties each time their artwork is resold in a secondary market. In this paper, we study the impact of NFT royalties on artists’ pricing decisions and the overall efficiency of the art market. We find that if the popularity of artworks is publicly known in the market, royalties diminish the resale value of artworks. This leads to lower transaction volume in both the primary and resale markets, making all market participants worse off. If artists possess superior knowledge about the popularity of their artworks than buyers, a popular artist may set an inefficiently high price to signal his popularity. Royalties benefit the popular artist by mitigating the price distortion in the primary market, but still hurt the transaction volume in the resale markets. As a result, the popular artist’s profit first increases and then decreases with the royalty rate, and there exists a unique positive royalty rate that maximizes his profit. The total social welfare may increase or decrease with royalties.
Keywords: NFT, Art Market, Blockchain, Royalty, Signaling Game
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Biography:
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Prof. Tony Ke is an Associate Professor of Marketing at The Chinese University of Hong Kong (CUHK) Business School. He received a PhD in Operations Research, an MA in Statistics and an MA in Economics from University of California at Berkeley, and a BS in Physics and a BS in Statistics from Peking University. His research is in the area of quantitative marketing, microeconomic theory and industrial organisation. His recent works focus on consumer search, online advertising and platforms, and economics of privacy, data and algorithms. His research work has been accepted for publication at Management Science, Marketing Science, Journal of Economic Theory, American Economic Journal: Microeconomics, and Production and Operations Management. He spent five years as an assistant professor at MIT Sloan School of Management before joining CUHK. He is an associate editor of Quantitative Marketing and Economics and on the editorial board of Marketing Science and Journal of Marketing Research.
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