A gallerist and an economist walked into an art gallery opening. The paintings on display featured the rape of dismembered corpses. The economist was horrified, but the gallerist said the work was good and the artist had a promising career. The gallerist was right. The artist is now a hot, emerging artist whose work sells for tens of thousands of dollars.

This is precisely what makes the art market baffling to outsiders. You’d think the value of art would depend on its aesthetic value; a picture you enjoy looking at on your wall. How could a dismembered corpse artist be remotely successful? Yet these paintings were classified as desirable by the art market.

To understand why, you must first understand the economics of art galleries in America and Europe. Almost all primary art sales—art bought from the artist as opposed to another collector—occurs through art galleries. Galleries set taste and prices—sets is actually an understatement. Galleries manipulate prices to an extent that would be illegal in most industries.

Someone with a financial interest controlling the market is worrisome. In any market, price manipulation causes distortions, shortages, and inefficiency. But in its own peculiar way the primary art market functions; contemporary art generates tens of billions of dollars of revenue each year. But would it work better with more regulation? Would that make art cheaper, more accessible and would there be more working artists? If you ask a gallerist why prices must not be “subject to the whims of the market” they’d probably tell you it’s to protect the artist. That sounds disingenuous coming from a party with a financial interest, but there is some truth to that statement. The nature of art as a commodity inherently makes efficient prices, meaning prices that reflect all available information about value, impossible. Value is subjective; the intrinsic value of a painting is paint and canvas—beyond that value is often a matter of taste. This is why the industry has developed an intricate signaling process where the approval of a handful of galleries, collectors and museums, determines what is good and valuable. Dealers who own and work at art galleries invest many resources in building the artist’s brand. But artists often take years to mature and have uneven periods, so any perception that an artist is over-hyped or overpriced can be anathema to his career. Value in art can be arbitrary but brands are fragile.

One of the worst things a dealer can do is over-price a work because they can’t lower the price when it doesn’t sell. Dealers may have an extraordinary amount of control over price, but desirable collectors are well educated consumers and won’t blatantly overpay. Galleries may drop an artist rather than lower the price of their work because doing so sends a bad signal about the value of the artist and the credibility of the gallery.

But perhaps it’s a vicious cycle. Prices can’t be trusted which necessitates more manipulation. If pricing were more meaningful perhaps artists’ careers would survive uneven periods or price bubbles for their work.

How brand building leads to price manipulation

In most markets prices are public knowledge and the commodity goes to the highest bidder. That process may be imperfect, but it does a good job at setting prices where supply meets demand; prices reflect their market value. The primary art market is different because galleries keep sales prices secret and are particular about who they’ll sell to; art prices are not market-set prices.

Galleries invest many resources in the artists they represent. They mentor them by visiting their studios, fostering their relationship with collectors and plot their career. But they’ll probably only represent a rising artist for a short time as the artist progresses they’ll move on to a higher tier gallery. Galleries promote the artist by presenting their art at an exhibition or at an art fair like Basel. Before new work is shown, the gallery has already offered it to their preferred clients, which include museums as well as major public and private collections. Their motivation to select buyers is inclusion in a major collection that signals that an artist’s work has been endorsed by the art world. This can increase the value of the artist’s portfolio and catapult him into another tier of prestige. Galleries also want to know the buyer in order to keep track of the work. That way they can ensure it’s available for exhibitions in the future and that it won’t be sold on the secondary auction market.

Control over the market is so important to galleries that they won’t sell to collectors who will flip the art in the secondary market. Art on the secondary market is often sold at an auction house. Once an artist’s work goes to auction the prices are observable to the public, and anyone (often uttered with disdain) can buy it. It is not uncommon for gallery owners to bid on their artists work at the auction in order to control the market price.

Despite the control galleries wield over the market, there exist some observable parameters which determine value. Art dealer Marla Goldwasser explained her basic criteria for valuing art. First and foremost is the aesthetic value. It need not necessarily be pretty to look at, but that often helps. Art is considered more valuable if it is provocative or especially moving. Red art tends to sell for more than work that features other colors. Felix Salmon observed polka dots, and more of them, also can increase value. (Value is established by comparing similar work of artists who are at the same stage in their career.) Scarcity also matters; a print which has several identical copies fetches less than a unique painting. Intrinsic value and labor also can matter, the size of the painting and material used often influence price. Being sold through a gallery, especially a high profile one, increases value. Goldwasser concedes sometimes you can get an equally attractive work on the street, for a fraction of the price, but you miss the investment value and social prestige of building a collection.

What high-end buyers look for in a work of art

A few years ago a young art collector from New York I know bought a painting from a New York gallery. A few weeks later she went to the Miami Basel art fair where a celebrity heard about the painting. He offered to buy it for more than 50 times what she paid for it. She refused and he raised his offer to a sum that would mean she’d never have to work again. She explained that she would not bargain with him—any resale of the painting must go through the gallery, so they’ll get a commission and select the price—not her. The young collector knew there would be consequences to making the sale. She may have owned the painting, but reselling it at a profit without the gallery’s permission would blackball her from the art industry. To her, that was not worth the millions she was offered.

Art collectors are different than consumers or investors in any other market. High-power art collecting is both time consuming and expensive, so collectors tend to be very wealthy. I spoke to a collector who is a member of one of America’s best-known collecting dynasties. His family has been extraordinarily influential in American art. “Art collection is more of an avocation than a utilitarian pursuit,” he says. He loves the art in his collection, but the social benefits are a large part of his enjoyment. He’s part of community of collectors who go to fairs together and enjoy a friendly rivalry around acquiring the work of certain artists. He’s spent his life in the company of major collectors, dealers, and artists, but is skeptical of the industry. He believes prices are often bogus; bad art often sells for far too much and he questions the integrity of many dealers. Several collectors I spoke with echoed this sentiment, yet each of them are avid collectors because they believe they are well informed, rarely overpay and enjoy what they’ve acquired.

Emerging art collector Jeremy Steinke does not merely look for art that’s pretty. He looks for rigor, art that tells a story, even if it may be disturbing, or very large in scale. Sandini Poddar, a former curator of the Guggenheim, looks for originality and a point of view: “Great art should communicate an idea.” Many of her favorite artists are from Asia and the Middle East artists who are social activists. The artist must display good technique and have a narrative that distinguishes itself or as she says “play outside the rules,” not only among his contemporaries, but within the history of art.

Large museums and prestigious collectors often pay less and have special access to certain work. Joan Young, Director of Curatorial Affairs at the Guggenheim, says that the museum may receive up to a 30% discount or higher. You’d think being in the permanent collection of a museum as prestigious as the Guggenheim would be so valuable to the artists’ brand that the museum would get an even bigger discount. But Young cautions: “You have to pick where to play hardball.” Even the Guggenheim faces competition and needs to cultivate a relationship with and fairly compensate the galleries.

Is there an alternative?

Price manipulation occurs at the elite end of the primary market. There exists a lower tier art market, full of small unknown, local galleries outside of large urban areas where prices are listed, transactions occur at that price, and the work is sold to whomever wants to buy it off the street. These collectors buy art simply because they love the work but artists who sell at these types of galleries probably can’t support themselves selling their work.

Would the market function better, and perhaps include more working artists, if galleries didn’t manipulate prices? An alternative to the gallery system in America and Europe exists in the Chinese art market. Unlike the primary art market in the West, 50% of primary sales in China are at auctions. This would seem to be more efficient, because prices are observable and set in the market, not selected by the gallery. But the Chinese market is extremely volatile, many think it’s over-heating, and price-rigging at auctions is common.

Another alternative is returning to the patron model which was popular before the gallery system. The gallery system is probably a better alternative because the artist has more stability than with a patron- model. With the patron model artists are dependent on the goodwill of a handful of people for their entire livelihood. It would probably mean even fewer working artists, because only artists with access to wealth patrons can support themselves. Galleries facilitate the relationships between collectors and artists and help groom the artists. Without that intermediary, fewer artists could thrive.

Another alternative would be forcing galleries to be more transparent. The sale price of a work of art could be publically listed, the same way that’s done for houses in the real estate market. Since 1988, New York State required galleries to “conspicuously display” prices, but this is often not enforced, or the prices displayed aren’t what the work actually sells for.

Enforcing this rule might be step in the right direction. If pricing were transparent, it would probably be lower and art more available to a wider range of collectors. This would be an unwelcome move for dealers and elite artists but it could also demystify the market and lower tier artists could earn more because the market would be less segmented. To some extent technology is naturally making it happen. Websites are cropping up that sell primary art and make it more available to the masses. Even Amazon has set its sights on the art market. It plans to partner with certain galleries to sell some of their inventory online but it’s not clear whether it will become a “market for lemons,” where the best pieces from the most promising artists are still reserved for certain collectors and prices of promising emerging artists still unknown.

Collectors and galleries prefer provocative work; a more transparent market might change tastes. The dealers and collectors I spoke to all believe they serve a vital role by setting high culture for our society. Financial interest aside, they are well suited for this task because many art insiders spend years in the industry and studied art history: They place contemporary art in its historical context. What most of us lay-people like, they’d find trite and devoid of social value. Artists who push boundaries and reflect social disorder serve an important role in history and our modern society. Yet in other cultural mediums, the masses determine taste. There is some terrible reality television, but it coexists with great television dramas which reflect important and uncomfortable aspects of our society.

That suggests the market doesn’t get it totally wrong when it comes to culture. But the price manipulation does seem to ensure a stable career for the elite, fledgling artists who make it in the industry. Stability is important because most artists take decades to mature and produce their best work. If they didn’t have decades to devote themselves to their craft we’d be bereft of some wonderful art which enriches us and will resonate with future generations.

Even if the market were more open there would always be an elite market for high-end contemporary art. This kind of work will always be expensive and keep us Real Housewives-watching, Thomas Kinkade-lovers priced out of that market. Price transparency probably may not make much difference in that market. Besides, even if collectors do end up overpaying, these tend to be very wealthy people. Being outraged at the practice of high-end art price rigging is like being upset that the market for high end yachts is inefficient. There are probably worse injustices in the world than wealthy people paying too much for art, which explains why there hasn’t been more regulation in this market. Defenders of the price manipulation contend it’s to protect artists and it seems to be true, at least for the elite artists who work the gallery system. But it could be the manipulation necessitates more manipulation, which ultimately benefits the galleries, and results in fewer working artists.