Post on 22-Jan-2021
597
Rare Coin Grading: A Case ofMarket-Based Regulation
John M. Cobin
This article draws on and expands my earlier empirical study of therare coin grading industry (Cobin 1997). Major additional contribu-tions are to (1) show the significant and important changes in the mar-ket during the last two decades (different firms, improved services,and greater competition); (2) add important and essential informationthat was missing or unknown due to innovations that have occurredin a now much more mature market; (3) vastly improve the tableswith more data and comparative statistics that support the case formarket regulation; and (4) provide details of the historical develop-ment of the industry. This updated study confirms that the industryprovides high-quality, market-based regulation at low cost for themultibillion-dollar rare coin marketplace. Ease of entry has have per-mitted dozens of firms to compete, forcing the current 13 survivors toimprove quality. Prices for the best firms’ services remain low eventhough higher than in 1994 because of quality improvements. As aresult, a strong case can be made for replacing government “publicinterest” regulation with more efficient market-based regulation,which emerges spontaneously to satisfy consumer demand.
Government versus Market RegulationMany studies have appeared in the last few decades that suggest
that government-enforced codes and regulations often fail to improve
Cato Journal, Vol. 34, No. 3 (Fall 2014). Copyright © Cato Institute. All rightsreserved.
John M. Cobin is Professor of Political Economy at the Swiss ManagementCenter University in Zug.
598
Cato Journal
safety and quality. Without a market test, there can be no assurancethat the benefits of regulation exceed its costs. Government regula-tors face different incentives than private ones, which actually impelthem to be inclined to overlook infractions. Public choice problemsrelating to inefficient institutions, rent seeking, regulatory capture,and perverse incentives—as well as the knowledge problem—preclude government regulation from being effective in producinghigher levels of safety and quality (Holcombe 1995).
Politicians and bureaucrats who implement public goods programsare always constrained by such public choice impediments. Whengovernment fails—that is, provides less net welfare (considering thecost of taxes and public inconvenience) than what can be obtainedthrough market forces—there is no longer any justification to con-tinue its regulatory activities. However, when private interests can beserved indirectly through a regulatory apparatus to reduce competi-tion, damage competitors, and force consumers to buy their products,an incentive is created to find some public interest purpose that canprovide the needed justification (Cobin 2014: 190–92). If, at the sametime, politicians and especially bureaucrats can benefit from such dis-guised private interest regulation—through larger status-enhancingbudgets, greater job security, more power, and indirect perks—theywill have an even stronger incentive to regulate (Niskanen 1971,1994; Simmons 2011). In the last several decades, the economics lit-erature has called into question the notion that bureaucrats will workto serve the public interest. As Nobel laureate James M. Buchanan(1991: 37) stated, “The mythology of the faceless bureaucrat follow-ing orders from above, executing but not making policy choices, andmotivated only to forward the ‘public interest,’ was not able to survivethe logical onslaught” from public choice theory.
In an attempt to find a remedy for government failure, at least inthe arena of regulation and planning, a literature has evolved thatpromotes the idea of market-based regulation (e.g., Alger and Toman1990; Blundell and Robinson 2000; Cobin 1997, 2013a, 2013b,2013c; O’Driscoll and Hoskins 2006; Poole 1982; Benson 1989). Thisarticle provides a case study of grading and evaluating in the rare coinindustry that tests the hypothesis of this literature: When competitionand concern for reputation are present, markets will spontaneouslyemerge to efficiently regulate the quality of goods and provide con-sumers with essential information (De Alessi and Staaf 1994, Klein1997, Komhauser 1983, Shapiro 1983).
599
Rare Coin Grading
Under normal circumstances, there is no reason to believe thatmarket provision will fail. Certain services might be under-suppliedif people who do not pay for them can benefit from them. However,the existence of positive externalities does not necessarily precludemarket provision. This article builds on the evidence from my studyof the rare coin industry and helps determine whether quality assur-ance is a public good that should be provided by government ormerely a private good that can be provided by the market.
Savas (1982) has argued that government is wasteful and substan-tial privatization is in order. Likewise, Schmidtz (1991) has made thecase that private enforcement mechanisms like “the assurance con-tract” or other voluntary solutions might be used to replace govern-ment’s role in public goods production, because the free-riderproblem cannot justify coercion. In his view, “government is itself animposer of negative externalities” (Schmidtz 1991: 89). Foldvary(1993) points out that (1) the nonprovision of a public good becomesa public bad, (2) determining the optimal provision of a public goodis a highly problematic process, and (3) governments are unlikely torelinquish power voluntarily.
There is theoretical support for the privatization of public services.Government enterprises have higher costs of production (Lindsay1976); private airlines are more efficient and productive than theirpublic counterparts (Davies 1971); and inefficient state-owned cop-per mines do far worse than privately owned mines (Villagrán andVermeo 2013). Surely, the last 50 years is replete with examples ofpublic enterprises that are less efficient than private ones. If decision-makers have neither an ownership interest in their organization nordirect accountability to the owners, then both the organization anddecisions will be subject to perverse incentives and distortedresource allocation.
Market failures are cited as the main justification for governmentintervention. However, the articles in Cowen’s (1988) compendium,The Theory of Market Failure, strongly suggest that the theory ofmarket failure has theoretical and empirical shortcomings.Externality and free-rider theory is particularly questionable (seee.g., the essays by Brubaker, Buchanan and Dahlman, Demsetz,Goldin, and Tiebout in Cowen 1988). Indeed, many important casestudies that provide empirical critiques of market failure theory showthat alleged cases of public goods can be provided by markets. Theseinclude Coase (1974) and Mixon (1992) on lighthouses, Cheung
600
Cato Journal
(1988) on the interaction between bees and apple blossoms in honeyproduction, Poole (1982, 1988) and Cobin (1997, 2013a, 2013b,2013c) on fire safety, and High and Ellig (1988) on the provision ofeducation in the United States and Great Britain. Therefore, many ofthe goods and services often considered to have a public nature maybe provided by markets. As de Jasay (1989) notes, it is also possiblethat the incidence of public goods in modem economies has beenexaggerated, leaving room for efficiency improvements by policiesthat commend market alternatives. He argues that voluntary partici-pation in collective action often is consistent with self-interest.
Holcombe (1995) and Sowell (1996) extend Austrian economicinsights by Mises and Hayek about knowledge to show that govern-ment provision of collective or public goods will not be efficient. Ifplanners were omniscient, then they might be able to plan effectively.However, they are not omniscient (even as a committee) and are thuswholly incapable of planning either effectively or efficiently—no mat-ter how altruistic they might be. Moreover, it may not simply beassumed that regulations actually accomplish what they are intendedto do because of public choice problems, including agencies having anatural inclination to favor the industries they regulate. The problemsof inadequate knowledge, perverse incentives, and inefficient institu-tions must be taken seriously when evaluating public provision of pri-vate goods.
The studies already noted have shown that consumers can be pro-tected without government regulation. O’Driscoll and Hoskins(2006) provide additional cases of private regulatory alternatives thatwork well: free banking (without a central bank or its regulation), cur-rency emission, arbitration and customary law, brand name genera-tion, approval seals like Good Housekeeping, and quality certifierslike Dun & Bradstreet and Underwriters Laboratories. More of suchinstitutions would exist, except that the government crowds themout. As Holcombe (1995: 103–4) writes, “With this illusion of a gov-ernment umbrella protecting everyone from harm, there is relativelylittle public demand for private regulation.”
It is evident that consumers are not entirely satisfied with gov-ernmental information generating services. The existence of insti-tutions like the Underwriters Laboratories, founded in 1894 byinsurers to provide risk data, and the Hearst Empire’s GoodHousekeeping seal of approval, a magazine marketing approachused from 1910 to the present day, are market mechanisms that
601
Rare Coin Grading
augment the standard-setting and regulatory infrastructure.However, the former has a tacit connection with governmentthrough its entwinement with the state’s regulatory apparatus andby potentially providing assistance for manufacturers that seek gov-ernment privileges, while the latter is more of a marketing tech-nique than a serious quality-certifying firm—making both of thempoor examples of market-based regulation. Alternatively, the sportscard (Dobrow 2014) and gemstone (Cobin 1997: 105–6) gradingand certification services are good examples of market-based regu-lation. However, they are not as impressive or mature as the rarecoin industry, which provides the best case to date of pure market-based regulation.
Consumers want to know more than just basic characteristicsabout an expensive product or service. They want to know somethingabout comparative and prevailing quality (and thus value), given thelarge capital outlay involved. In spite of the fact that much may begleaned from considering Good Housekeeping and UnderwritersLaboratories from the standpoint of certification, neither of them aregrading firms. In addition, it is not clear that they are suitable exam-ples of certification services that would develop without governmentregulation of safety or quality. It is possible that, because of its privi-leged position, Underwriters Laboratories is not being continuallyhoned by the competition that would exist without government reg-ulation of building quality. Moreover, because of the nature of gov-ernment regulation, it is not clear that they efficiently transmit thelowest cost to consumers. Without rigorous competition, which isalso rivalry for reputation, there can be no certainty that standardswill be set optimally, that is, without serving private interests of a sin-gle firm or industry that is resting on political privilege.
Quality Grading Services in the Rare Coin Industry:A Clear Case of Market Regulation
Because a market framework with wholly market-based institu-tions is vastly different from a government-regulated one, it is appro-priate to consider only the most market-based institutions that haveemerged to alleviate imperfect information, in this case those in therare coin industry. Given the absence of government regulation andthe demand for grading and certification services for rare coins, mar-kets have spontaneously generated institutions to meet consumer
602
Cato Journal
needs. The rare coin industry is a lucid example of a market-regula-tory institution. It serves a vibrant and large market (Milburn 2013),where a single coin can sell for several million dollars, and has gener-ated many billions of dollars in annual sales (excluding unreportedtransactions), with trading in hundreds of mintages.
Rare coins have become a strong investment alternative, partlybecause of their precious metal content (“realness”). According toAllard (1990: 279), returns on rare coin investments exceeded 15 per-cent annually on average from 1970–90, and rare coin sales skyrock-eted to nearly $1 billion annually by the late 1980s. Today salesexceed $10 billion, according to CoinTrackers website. Although rarecoin prices do not always rise, they always warrant quality certifica-tion because the price differentials between grades are so large.Indeed, at the “proof” level, even a slightly different grade can dou-ble a coin’s price, or more than double it in the case of the highestgrades. The bottom line is that the rare coin market is fluid, dynamic,often pricey, and a single step in grade can make a big difference inprice. Quality grading is of paramount importance to both the sellerand especially the buyer.
Rare coin grading and certification requires great skill and knowl-edge, and specialists can expect to earn salaries in excess of $200,000per year (Cobin 1997: 96). Moreover, just as information leading tobuilding grading and certification services can be viewed as a publicgood, rare coin grading and authenticating could be considered asproviding a public benefit. Potentially, the information might be con-sidered a public good because consumption is nonrival and excludingthose who do not pay for the services would be difficult. Rare coinshops face this reality because anyone walking by can see the gradeof the coin; online auction services face it as well.
The potential free-rider problem in rare coin grading and certify-ing arises since someone is receiving an external benefit without pay-ing for it. That is, many shoppers benefit from better informationbeing displayed by graded and certified rare coins, but the only onewho actually pays for it is the buyer, not the shoppers.
In fact, markets for private grading and certification (information)services help circumvent the free-rider problem because graded andcertified coins command a premium, allowing rare coin dealers tocapture the benefits through giving information to every potentialbuyer. Moreover, since each rare coin is unique, it is possible to gradeone without grading them all, making the grading and certification of
603
Rare Coin Grading
a particular rare coin an excludable service. Hence, rare coin ownersand sellers have an incentive to give away grade and certificationinformation, much like advertising.
The Rare Coin Certification IndustryGovernments are not the only institutions that provide certifica-
tion and grading services. The market has also met demand for suchservices in many industries, including the rare coin industry. It isclear enough, on account of the existence of private inspectors andcertification firms which are employed by lenders, insurance compa-nies, and consumers, that private industry could provide market reg-ulatory alternatives that alleviate negative externalities and improveknowledge (although they are ancillary to the government regulatoryprocess). The ensuing subsections demonstrate that even withouthaving a government grading service in place, the market for rarecoins has generated an alternative to government quality certificationthat alleviates both imperfect information and externality problems.It shows that when consumers demand such services, the market isable to provide them.
Coin Grading Schemes, Certification Firms, and Reputation
The U. S. government has minted coins since 1793, using variousmetals and sundry denominations (Cook, Cribb, and Carradice1990). Collecting American coins has evolved from a hobbyist’s fas-cination to a lucrative investment activity. Indeed, rare coins havebeen one of the top-performing investments in the last severaldecades, with some Wall Street firms even developing limited part-nership interests in rare coin portfolios and a rare coin index to trackthe market (Allard 1990, Milburn 2013).
Since 1986, the industry has generally accepted a system in whichuncirculated coins are graded by one of many independent organiza-tions that assign numerical standards based on appearance. The U.S.system established by the American Numismatic Association, asdescribed in Table 1, is the most widely used.
The rare coin industry provides a lucid example of how the freemarket handles the demand for grading services. Prior to the 20thcentury, all coins were simply graded as either “new” or “used”(Ruddy 1995: 5). Today, rare coins are valued according to both theirrarity and their grade. “Proof” (PR or PF) refers to the method of
604
Cato Journal
TA
BL
E1
Am
eric
anN
um
ism
atic
Ass
oci
atio
n(A
NA
)C
oin
Gra
din
gSc
hem
e
Coi
nC
ondi
tion/
Gra
deO
rdin
alG
rade
Gra
des
Use
din
the
Mar
ket
Poor
(P)
P-1
1A
bout
Goo
d(A
G)
F-2
2V
ery
Fai
r(V
F)
AG
-3an
dA
G-3
.5A
G,A
G3,
AG
3.5
Goo
d(G
)G
-4to
G-7
Gor
G4
and
G6
orG
_V
ery
Goo
d(V
G)
VG
-8to
VG
-11
VG
orV
G8
and
VG
10or
VG
_F
ine
(F)
F-1
2to
F-1
9F
orF
12an
dF
15or
F_
Ver
yF
ine
(VF
)V
F-2
0to
VF
-29
VF
,VF
20an
dV
F25
Cho
ice
Ver
yF
ine
(CV
F)
VF
-30
toV
F-3
9V
F_
,VF
-30,
VF
35or
CV
FE
xtre
mel
yor
Ext
raF
ine
(EF
)E
F-4
0to
EF
-44
EF
40or
EF
Cho
ice
Ext
rem
ely
Fin
e(C
EF
)E
F-4
5to
EF
-49
EF
45or
CE
FA
bout
Unc
ircu
late
d(A
U)
AU
-50
toA
U-5
4A
Uor
AU
50C
hoic
eA
bout
Unc
ircu
late
d(C
AU
)A
U-5
5A
U55
orC
AU
Bor
derl
ine/
Bri
llian
tUnc
ircu
late
d(B
U)
AU
-56
toA
U-5
9B
U,A
U-5
8or
CA
UM
intS
tate
(MS)
MS-
60to
MS-
64M
S60,
MS6
1,M
S62,
MS6
3,M
S64
Cho
ice
Unc
ircu
late
dM
S-65
MS6
5G
emU
ncir
cula
ted
MS-
66to
MS-
69M
S66,
MS6
7,M
S68,
MS6
9Pe
rfec
tUnc
ircu
late
dM
S-70
MS7
0
Sour
ces:
Rud
dy(1
972)
,Yeo
man
(199
4).
605
Rare Coin Grading
manufacture and the condition is usually perfect uncirculated.Uncirculated levels above “borderline or brilliant uncirculated” (BU)are also referred to as “mint states” (MS). A corresponding numeri-cal ranking system now predominates, with the lower grades of coinsbeing assigned numbers from 1 to 49, and “about uncirculated”(AU), BU, and MS grades of coins receiving numbers from 50 to 70(Yeoman 1994: 5).1 The technique for grading coins was standardizedby the end of the 20th century (Halperin 1990), which has provideda means for markets to identify the rarest and most valuable coins.According to the Professional Coin Grading Services (PCGS) web-site, there are 15 very rare, graded U.S. coins worth between$4.5 million and $15 million each.
Grades of 60 to 70 are reserved for a “perfectly preserved coin”(Allard 1990: 279). In general, other than perhaps a handful of excep-tionally rare coins, only coins with grades of BU or MS-60 to MS-67are actively traded as investments. Sometimes a _ symbol will beadded to the grade to indicate that it is close to another level. Highergrades from MS-68 to MS-70 are extremely rare or do not exist formost collectible, nonbullion coins.
Coins with AU grades are often purchased as substitutes for goldor silver, not having a significant premium over the value of theirmetal content. Nonetheless, they do have some collectable value andprovide insurance against confiscation by government because theyare a coin rather than just hunks of gold or silver (holding gold wasdeclared illegal by President Franklin D. Roosevelt in 1933 for all butjewelers, dentists, collectors, and miners).
A coin’s grade is affected by authenticity, luster, strike, color, ton-ing, friction, coin or die flaws, and obverse/reverse grade consolida-tion (Martin 2008). Rare coins are slabbed—that is, encapsulated bygrading firms into acrylic holders to protect the coins—and theirgrade is certified in the encasement. Typically, the encasement alsoindicates the name of the grading firm and the type of coin encapsu-lated. The grade is invalidated if the encasement is tampered with.Daily market quotations are available for slabbed coins. Thus, deal-ers of rare coins are enabled to trade more productively with theincreased knowledge, as well as reliability and verifiability, generatedby this market process (Allard 1990: 279).
1There is also the Sheldon numerical system of grading, from which poor, veryfair, BU and Gem classes are derived (Ruddy 1995: 112).
606
Cato Journal
Dealers and consumers benefit from the existence of numerousnewsletters, reports, catalogs, and pricing guides, which provide con-tributive analyses and recommendations (Allard 1990: 284–85).These publications include the Coin Street Journal, Coinage,COINfidential Report, Coins, ANS Newsletter, The Numismatist,Numismatic News, Coin World, COINage Magazine, and WorldCoin News. Services provided by rare coin grading and certificationfirms include grading, authentication, photo certification, encapsula-tion, and low-cost, comprehensive insurance (Cook, Cribb, andCarradice 1990: 7). Table 2 gives the names and locations of themajor firms in North America, Europe, and Asia that provide someor all of these considerable and specialized services. The percentagecolumns in Table 3 reflect the average percentage of “sheet price”paid for a coin by dealers when the coin purchased is unseen—thatis, when it is ordered by telephone or the Internet. The percentagemeasures the relative confidence that dealers have in the slabbingfirm’s ability to grade a coin correctly; it is an excellent proxy for rep-utation. A higher percentage translates into a better reputation rela-tive to market competitors. Thus, the typical buyer can easily assessthe value of the information produced by a particular firm. A higherpercentage suggests that a firm is reliable and, subsequently, trans-lates into greater market share.
Benefits of Low-Cost, Competitive, Innovative GradingServices and Products
Inexperienced buyers can now purchase coins that have beengraded and authenticated by third-party services to assure the qual-ity of each item, and there is more written information available forbeginners than ever before. The pricing of rare coins is also verycompetitive in today’s open market where profit margins are oftenlower than in the past. In addition to the benefits, the industry hasdone a credible job of upgrading the quality of services provided bycoin dealers through organizations and associations that promotestrong professional conduct and ethics (Yeoman 1994: 6). The indus-try is large and competition is fierce in North America, Europe, andAsia. While the preeminent firms’ market positions have changed lit-tle in the last 19 years, most firms have lost some prestige, indicatingthe value the market places on coin grading service quality.
607
Rare Coin Grading
TA
BL
E2
Coi
n-G
radi
ngF
irm
sby
Cou
ntry
,Ran
ked
Acc
ordi
ngto
Pres
tige
Pres
tige
Lev
elN
ame
ofF
irm
Acr
onym
Tra
deN
ame
Uni
ted
Stat
esT
ier
1(B
est)
Prof
essi
onal
Coi
nG
radi
ngSe
rvic
es(1
986)
PCG
SN
umis
mat
icG
uara
nty
Cor
pora
tion
(198
7)N
GC
Tie
r2
Inde
pend
entC
oin
Gra
ders
(199
8)IC
GA
mer
ican
Num
ism
atic
Ass
ocia
tion
Coi
nSe
rvic
es(1
972)
AN
AC
ST
ier
3Ph
oto
Cer
tifie
dIn
stitu
te(1
986,
acqu
ired
byD
omin
ion
Gra
ding
Serv
ices
in20
08)
PCI/
DG
SSo
vere
ign
Ent
ities
Gra
ding
Serv
ice
(199
8)SE
GS
Tie
r4
(Wor
st)
Num
ism
atic
Cer
tific
atio
nIn
stitu
te—
Her
itage
Coi
ns(1
984)
NC
IIN
SA
uthe
ntic
atio
nB
urea
uC
oin
Gra
ding
(197
0s,o
utof
busi
ness
)IN
SR
esid
ualF
irm
s,A
SA-A
ccug
rade
(198
4,ou
tofb
usin
ess,
caps
ule
pate
ntac
quir
edby
PCG
S)A
CG
Spec
ialty
Am
eric
anC
oin
Gra
ding
Serv
ice
(200
2,ou
tofb
usin
ess)
AC
GS
Fir
ms,
Glo
balC
ertif
ied
Serv
ice
(200
1,ou
tofb
usin
ess)
GC
SN
ewco
mer
Num
ism
atic
Con
serv
atio
nSe
rvic
e(2
001)
NC
SF
irm
s,M
inor
Am
eric
anC
oin
Clu
bG
radi
ngSe
rvic
e(1
987)
AC
CG
SPl
ayer
saSt
arG
radi
ngSe
rvic
e(2
003)
SGS
Num
isT
rust
Cor
pora
tion
(201
3,re
star
ted)
NT
CC
anad
aIn
tern
atio
nalC
oin
Cer
tific
atio
nSe
rvic
e(1
986)
ICC
SC
anad
ian
Coi
nC
ertif
icat
ion
Serv
ice
(200
6)C
CC
S cont
inue
d
608
Cato Journal
TA
BL
E2
(con
t.)C
oin-
Gra
ding
Fir
ms
byC
ount
ry,R
anke
dA
ccor
ding
toPr
esti
ge
Pres
tige
Lev
elN
ame
ofF
irm
Acr
onym
Tra
deN
ame
Uni
ted
Kin
gdom
Coi
nG
radi
ngSe
rvic
eL
td.(
2005
)C
GS
Ger
man
ybN
umis
mat
icG
uara
nty
Cor
pora
tion
(198
7)N
GC
Num
ism
atic
Con
serv
atio
nSe
rvic
e(2
001)
NC
SF
ranc
ePa
cific
Coi
nG
radi
ngSe
rvic
es(1
986)
PCG
SSw
itzer
land
Num
ism
atic
Gua
rant
yC
orpo
ratio
n(1
987)
NG
CN
umis
mat
icC
onse
rvat
ion
Serv
ice
(200
1)N
CS
Hon
gK
ong
Paci
ficC
oin
Gra
ding
Serv
ices
(198
6)PC
GS
a The
rew
ere
atle
ast2
5ot
her
min
orgr
adin
gco
mpa
nies
that
wen
tint
obu
sines
san
dth
enfa
iled,
leav
ing
thei
rsla
bsbe
hind
inth
em
arke
tpla
ce.
b For
Ger
man
coin
s,an
othe
rim
port
antg
rade
ris
Ron
Gut
h(a
ffilia
ted
with
PCG
S)in
San
Die
go,s
ince
1988
.So
urce
s:“R
edB
ook”
(AG
uide
book
ofU
nite
dSt
ates
Coi
ns),
ww
w.a
llcer
tifie
dcoi
ns.c
om/c
oins
_sla
bcom
pani
es.h
tml,
com
pany
web
sites
,and
Cob
in(1
997:
101–
2).
609
Rare Coin Grading
Of course, the greysheet percentages vary widely, and that dynamismgives consumers prices and up-to-the-minute information on howinformed decisionmakers view the grading services. The percentagesmight also reflect concern in the market over the unchecked exis-tence of counterfeit slabs, against which firms have had to raise tech-nological capability that preclude falsification. Newcomer NTCclaims that it has been creating a niche market by offering acounterfeit-proof service, but the firm provided me with no specialevidence to support the claim. Nonetheless, the issue is one ofincreasing relevance to collectors.
Furthermore, the fact that there are eight American competi-tors, three or four of which are doing well, suggests that there areno substantial barriers to entry and thus little evidence of monop-olization from the pre-1990s firms: ANACS, PCGS, and NGC.PCGS has graded over 27 million coins since its inception in 1986,with a market value of nearly $30 billion. NGC has graded over
TABLE 3Top U.S. Coin Grading Firms’ Reputation Ratings
Greysheet Ratinga
PercentageFirm November 12, 1994 November 29, 2013 Change
PCGS 98 83.1 –15.2NGC 89 82.9 –6.9ICG n/a 65.7ANACS 74 65.2 –11.9PCI/DGS 84 52.1 –38.0SEGS n/a 47.6NCI 42 42.5 _1.2INS 43 34.0 –20.9
aAverage percentage of “sheet price” paid for an unseen coin, with a rangeof ±15 percent for the four better firms, and as much as ±32 percent forthe others. The “greysheet” is jargon for a price list of slabbed and “raw”coins found in the Coin Dealer Newsletter. There is also a “bluesheet” forunseen slabbed coins only, without return privilege.Source: Coin Dealer Newsletter.
610
Cato Journal
28 million coins since 1987. Together, PCGS and NGC still havemore than one-half of the overall market share (Vousvounis 2013),but all the new competitors with lower prices have eroded themassive market share disparities of the 1990s. In 1994, firms esti-mated industry market share as follows: PCGS had about 60 per-cent, NGC had 35 percent, and all the other firms had 5 percent(Cobin 1997: 104). Now the market has many more participants,and NGC, ICG, and ANACS have all improved their greysheetpositions, with newcomers like SGS and NTC making significantinroads.
The rare coin industry is a vibrant example of fervent competi-tion and resulting industrial organization. The following are illus-trative and suggest that high fixed costs, lack of scale economiesand of established reputation do not prevent firms from enteringthe market: PCI’s entry in 1994, its subsequent merger withHallmark in 1991, changes of ownership in 2001, 2002, 2006,2007, and the DGS takeover of PCI in 2008; SEGS and ICG’sentry in 1998; NCS’s entry in 2001; ACGS’s entry in 2002; CGS’sentry in 2005; and NTC’s re-entry in 2013. Moreover, the morethan two dozen failed entries indicate that the market is quitemature and that newcomers must overcome significant reputationdisadvantages in order to break into the rare coin gradingmarket and survive; trust and reliability are paramount(Vousvounis 2013).2
There are also do-it-yourself or pre-made slabs in circulation,which are really just “shells” that look like the acrylic slabs used byprofessional firms. These shells are commonly seen in the marketand carry names like Coin World, American Coin Club GradingService, Certified Coin Grading Service, International Numismatic
2These failed grading firms include: National Numismatic Certification,TruGrade Service, American Grading Service, American Numismatic Institute,Capitol Coin Grading Service, Digital Coin Grading Service, FiducialSelect Capitol, Hallmark (1987), Independent Grading Service, Millennium CoinCertification Services, North American Numismatic Certification, New StandardCoin Grading Service, NuGrade Service, Numismatic Grading Service, NUMIS-PRO, Premier Certified Coins, Premier Coin Grading and Authentication,Professional Numismatic Grading Service, Professional Grading Service, SilverDollar Grading Service, Twenty-first Century Grading Service, UniversalGrading Service, and United Numismatic Company. These companies, by andlarge, were formed from 2000 to 2006.
611
Rare Coin Grading
Bureau, Original Coin Certifiers, and Liberty Coin GradingService.3
Numerous attempts have been made to enter the certification wingof this multibillion-dollar industry, obviously, because the high volumeof coins to be graded makes for a lucrative business and consumerdemand for services is brisk. Nevertheless, there have been only minorallegations of antitrust violations and collusion in the industry.4 Privatelawsuits are another story. Given the high value of many coins, therehave been a number of significant lawsuits regarding rare coins, andthere are now law firms with practices that specialize in rare coin cases,especially slab counterfeiting or fraud. Thus, coin-grading firms arekeen to stay on top of potential problems (Loftus 2012).
Rates and services vary considerably between firms. Table 4 andTable 5 list prices of the main grading services at the end of 2013.Table 6 provides special slab features offered by some U.S. firms.5
Additionally, most firms offer rush services, substantially increas-ing the grading cost per coin, which may demonstrate how firmsserve consumers that “search for firms with acceptable waits”(De Vany and Saving 1983: 996). At the end of 2013, there were eightmain competitors in the rare coin certification industry in the UnitedStates and perhaps six elsewhere (including multinationals likePCGS, NGC, and NCS).
3Others include United States Grading Service, Certified Rare Coins, CertifiedService, Investment Grade Coins, Colonial Coin Graders, Coin Fixation, FirstStrike Grading, Global Coins Grading Service, Heritage Coin Grading,International Numismatic Certification Service, MS Society D&E Coins,Numismatic Evaluation Service, National Numismatic Grading Service,Professional Coin Graders, Professional North American NumismaticService, Pacific Northwest Graded Coin, Quality Coin Grading & CertificationService, Specialty Coin Grading, Expert Grading Company, Elite NumismaticGrading Service, Investment Grading Service, Hallmark Coin Grading Service,Modern Coin Specialists, Northwest Coin Grader, Professional NumismaticGrading Service, and World Coin Grading, Gallery Grading Company.4See, for example, ASA Accugrade v. American Numismatic Association, et al.,370 F.Supp.2d 213 (2005), U.S. District Court, District of Columbia (www.swcgs.com/ASA_v_ANA.html).5Company websites on December 6, 2013, were: PCGS (www.pcgs.com), NGC(www.ngccoin.com), ICG (www.icgcoin.com), ANACS (www.anacs.com), PCI(www.pcicoins.com), ACCGS (www.accgs.org), SEGS (segscoins.com), SGS(www.stargrading.org), NCS (www.ncscoin.com), NTC (www.ntccoin.com), CGS(www.coingradingservices.co.uk), and CCCS (www.canadianccoincertification.com).Note that ICCS did not have a website when this research was being conducted.
612
Cato Journal
TA
BL
E4
U.S
.Rar
eC
oin
Gra
ding
Serv
ice
Pric
ing
Pric
ing
(U.S
.Dol
lars
)
Stan
dard
(One
Pre-
1965
Gol
dC
oin)
12–1
5B
usin
ess
Day
Nor
mal
Tur
naro
und
Tim
e
Val
ue%
.$2
0,00
0%
.N
ongo
ld$1
00,0
00R
ariti
esw
/oV
alue
Und
erSi
nce
Max
.Val
ueSi
nce
Coi
nsor
Oth
erM
ax.V
alue
with
Lim
it(%
Val
ueC
harg
ed)
Fir
m/C
rite
ria
$3,0
0019
94a
4–5
Day
s19
94b
Eco
nom
yPr
ice
2–3-
day
Rus
han
d/or
One
-day
Serv
ice
PCG
S45
_20
0%65
_33
3%25
125
250
(_1%
)N
GC
30_
100%
60_
300%
1712
560
0IC
Gc
19n/
a25
n/a
1250
90A
NA
CSd
19_
58%
29_
142%
1549
100
PCIe
n/a
n/a
10_
33%
1016
35SE
GSf
1515
1515
15A
CC
GSg
919
924
29N
CSh
30n/
a60
n/a
1710
050
(_3%
–5%
)SG
Si10
1010
1010
NT
Cj
1516
1230
50
a Val
uelim
itw
as$2
,000
in19
94;p
rices
base
don
data
inC
obin
(199
7:T
able
9).O
ne-d
ayru
shse
rvic
eco
st$1
40in
1994
for
PCG
S.b V
alue
limit
was
$5,0
00in
1994
;pric
esba
sed
onda
tain
Cob
in(1
997:
Tab
le9)
.One
-day
rush
serv
ice
cost
$125
in19
94fo
rN
GC
.c F
orIC
G,f
orei
gn(n
on-U
.S.)
coin
sco
st$1
9.O
ne-d
ayse
rvic
efo
ral
lcoi
nsis
$90.
The
two-
day
serv
ice
rate
of$5
0is
only
for
coin
sva
lued
unde
r$1
0,00
0.T
hefiv
e-da
yse
rvic
era
teof
$25
ison
lyfo
rco
ins
valu
edun
der
$7,5
00.T
he10
-day
serv
ice
rate
of$1
9is
only
for
coin
sva
lued
unde
r$5
,000
.The
econ
omy
serv
ice
rate
of$1
2is
only
for
coin
sva
lued
unde
r$5
00.C
oins
over
thes
e
613
Rare Coin Gradingva
lues
will
bech
arge
dth
efu
ll$9
0an
dha
veon
e-da
yse
rvic
e.O
nD
ecem
ber
6,20
13,t
hew
ebsit
ead
vert
ised
asp
ecia
lpric
epr
o-gr
am:i
f10
coin
sw
ere
subm
itted
,the
pric
eof
each
coin
inth
eec
onom
ypr
ogra
mw
ould
bere
duce
dto
$10
and
to$1
5ea
chin
the
10-d
aytu
rnar
ound
prog
ram
.d F
orA
NA
CS,
fore
ign
(non
-U.S
.)co
ins
are
the
sam
epr
ice
buth
ave
nopr
ecise
deliv
ery
time
spec
ified
.One
-day
serv
ice
for
all
coin
sis
$100
;itw
as$5
9in
1994
(see
Cob
in19
97:T
able
9).T
hetw
o-da
yse
rvic
era
teof
$49
ison
lyfo
rco
ins
valu
edun
der
$10,
000.
The
five-
day
serv
ice
rate
of$2
9is
only
for
coin
sva
lued
unde
r$5
,000
.The
15-d
ayse
rvic
era
teof
$19
ison
lyfo
rco
ins
valu
edun
der
$2,0
00.T
heec
onom
yse
rvic
era
teof
$15
($19
fore
ign)
ison
lyfo
rco
ins
valu
edun
der
$500
,has
afiv
e-co
inm
ini-
mum
,and
cann
otbe
gold
coin
s(e
xcep
tfor
eign
).C
oins
over
thes
eva
lues
will
bech
arge
dth
efu
ll$1
00an
dha
veon
e-da
yse
rvic
e.M
oder
nco
ins
(pos
t-19
50)h
ave
afiv
e-co
inm
inim
uman
dco
st$1
0($
12fo
reig
n,m
axim
umva
lue
of$5
00).
e ForP
CI,
add
$15
toth
esta
ted
pric
efo
rfor
eign
(non
-U.S
.)co
ins.
The
$35
pric
eha
snot
hing
todo
with
rarit
yin
this
case
butr
athe
rone
-da
yse
rvic
e.C
oins
valu
edfro
m$1
,000
to$5
,000
pay
anad
ditio
nal$
15,a
ndco
insw
orth
mor
eth
an$5
,000
pay
$20
addi
tiona
l.O
nD
ecem
ber6
,201
3,th
ew
ebsit
ead
verti
sed
asp
ecia
lpric
epr
ogra
m:“
Und
erN
ewM
anag
emen
t.10
Coi
ns!5
Day
s.7
Buc
ksea
.!”f F
orSE
GS,
the
singl
epr
ice
appl
ies
toan
yco
inre
gard
less
ofva
lue,
date
,rar
ity,e
tc.S
EG
Sch
arge
s$5
topr
e-sc
reen
and
grad
eth
eco
in.I
fenc
apsu
latio
nis
desir
edla
ter,
anad
ditio
nalf
eeof
$8is
requ
ired.
The
reis
noex
plan
atio
nas
tow
hyth
e$1
3to
talc
ost
for
this
met
hod
isle
ssth
anor
derin
gth
een
tire
prog
ram
for
$15.
g AC
CG
Son
lyde
signa
tes
pric
etie
rsba
sed
onsp
eed
ofse
rvic
e;no
cons
ider
atio
nis
mad
efo
ra
coin
’sva
lue
orra
rity.
“Dat
edap
prai
sal”
incl
uded
inth
esla
bco
sts
anad
ditio
nal$
2,as
does
“est
imat
edsu
rviv
ing
cens
us”
info
rmat
ion.
“Pho
toce
rtifi
cate
s”co
st$1
0.h N
CS
isa
coin
cons
erva
tion
serv
ice
rela
ted
toN
GC
.Ser
vice
pric
esfo
rsla
bbin
gar
eth
esa
me
asN
GC
’s.T
he“e
valu
atio
n”se
rvic
eco
sts
1pe
rcen
toft
heco
in’s
valu
e($
10m
inim
um).
The
“con
serv
atio
n”st
age
cost
s“4
perc
ento
fdec
lare
dva
lue
upto
$150
,000
per
coin
,2pe
rcen
tofd
ecla
red
valu
eov
er$1
50,0
00pe
rco
in,$
15m
inim
umfe
e,”
acco
rdin
gto
the
com
pany
web
site.
The
reis
a$1
00“w
alkt
hrou
gh”
fee
and
a$5
0“e
xped
ite”
fee.
i The
SGS
web
site
says
that
firm
only
slabs
coin
sw
itha
grad
eof
60to
70.O
ther
sar
ece
rtifi
edan
d/or
retu
rned
:10
perc
entf
or10
–99
coin
s;15
perc
entf
or10
0_.T
hesin
gle
pric
eap
plie
sto
any
coin
rega
rdle
ssof
valu
e,da
te,a
ndra
rity.
The
com
pany
clai
ms
that
itgr
ades
7pe
rcen
tofa
llco
ins
liste
don
eBay
onlin
eau
ctio
ns.
j NT
C(N
umisT
rust
Cor
pora
tion)
offe
rsa
7-da
yse
rvic
e(in
stea
dof
4–5
days
)with
ath
ree-
coin
min
imum
.The
yof
fer
a20
-day
serv
ice
for
$10
per
coin
($16
for
gold
coin
s.M
oder
nco
ins
since
1955
are
only
$6ea
ch,a
lthou
ghan
othe
rlin
eon
the
web
site
stat
es$5
each
,and
the
“non
-gol
dec
onom
y”ra
teis
$8pe
rco
in(2
4–30
day
serv
ice)
.Coi
nspr
ior
to19
55co
st$7
togr
ade.
The
$50
figur
ein
the
rarit
ies
colu
mn
has
noth
ing
todo
with
rarit
yva
lue
butr
athe
rw
ithon
e-da
yse
rvic
e.So
urce
s:C
ompa
nyw
ebsit
esvi
ewed
onD
ecem
ber
6–7,
2013
;Cob
in(1
997:
101–
5).
614
Cato Journal
TA
BL
E5
Can
adia
nan
dB
riti
shR
are
Coi
nG
radi
ngSe
rvic
ePr
icin
g
Stan
dard
Serv
ice
Tur
naro
und
Tim
eV
arie
sO
ther
/Spe
cial
Non
gold
Rar
ities
w/o
Val
ueL
imit
Val
ueV
alue
Val
ueV
alue
Val
ueC
oins
orO
ther
(%V
alue
Cha
rged
)F
irm
/Cri
teri
aR
ange
1R
ange
2R
ange
3R
ange
4R
ange
5E
cono
my
Pric
eF
astS
ervi
ce
CC
CSa
CD
N20
CD
N20
CD
N20
CD
N20
CD
N20
n/a
n/a
CG
SbG
BP
14G
BP
24G
BP
39G
BP
65G
BP
95G
BP
141 /2
%of
valu
e
a One
Can
adia
nD
olla
rw
asw
orth
0.94
U.S
.Dol
lars
onD
ecem
ber
7,20
13.
b One
Brit
ishPo
und
was
wor
th1.
64U
.S.D
olla
rson
Dec
embe
r7,
2013
.Som
epr
ices
inth
eta
ble
are
roun
ded.
Coi
nG
radi
ngSe
rvic
esof
Ken
t,U
K,a
ppea
rsto
beaf
filia
ted
with
the
Tax
Fre
eGol
dst
ore.
“Sta
ndar
dse
rvic
e”(£
13.7
5)ta
kes
30to
90da
ysan
dth
eco
inva
lues
mus
tbe
unde
r£2
00.“
Nor
mal
serv
ice”
(£23
.75)
take
s30
to90
days
and
the
coin
valu
esm
ustb
eun
der
£2,0
00.
“Del
uxe
serv
ice”
(£39
)tak
es15
days
and
the
coin
valu
esm
ustb
eun
der
£5,0
00.“
Prem
ier
serv
ice”
(£65
)tak
es10
days
and
the
coin
valu
esm
ustb
eun
der
£10,
000.
“Sta
rse
rvic
e”(£
95)t
akes
5da
ysan
dth
eco
inva
lues
mus
tbe
unde
r£2
0,00
0.So
urce
:Com
pany
web
sites
.
615
Rare Coin Grading
The consumer price index stood at 149.7 in November 1994, risingto 233.6 in October 2013 (an increase of 56.1 percent). The percent-age change in prices in Table 4 is based on nominal prices, but thechanges in real terms are still significant, evidently reflecting returnsto reputation and higher quality. Fierce price competition forces eventhe best firms to keep their fees low. The rare coin industry is aremarkable testimony to just how well competition reduces consumerprices for important services. The volume is also high enough thatmany firms can enter the market (charging a lower price) and stillmake money, sometimes with slight product differentiation. One cansee exactly how much reputation is worth in the price differentialsbetween PCGS or NGC and everyone else (Wolinsky 1983).
Table 7 indicates that truly rare coins make up a relatively smallportion of all graded coins, especially coins minted outside of theUnited States. NGC subsidizes its core rare coin business by mainlyslabbing bullion and other nonrare (but still collectible) coins, which
TABLE 6Rare Coin Grading Service Slab Special Features
Slab Special Features
Holder Has Oversized Chemically Coin EdgeFirm/ Top Edge Holder Option Inert Flexible (Inside Slab)Criteria Viewing Label for Added Fee Plastic Case Is Viewable
PCGS No Yes No NoNGC No Yes No YesICG No No No NoANACS No No No NoPCI No No No NoSEGSa Yes No Yes NoACCGS No No No NoNCS No Yes No YesSGS No No No NoNTC No No No NoCCCS No No No NoCGS No No No No
aThis firm also provides a “sovereign series” service for $35 in which thesignature of a grading expert is encapsulated with the coin.Source: Company websites.
616
Cato Journal
TA
BL
E7
Sum
mar
yof
Sele
cted
Coi
nsan
dT
oken
sG
rade
dby
NG
C(D
ecem
ber
22,2
013)
Coi
nT
ype
/M
SPe
rcen
tage
ofN
umbe
rG
rade
d(_
sm.%
360
)Pr
oof
Tot
alal
lCoi
nsG
rade
d
U.S
.Silv
erD
olla
rs(5
type
s),1
840–
1978
3,50
9,81
741
,356
3,55
1,17
312
.64%
All
U.S
.Gol
dC
oins
(non
bulli
onco
ins)
,179
5–19
332,
682,
408
9,59
72,
692,
005
9.58
%U
.S.S
o-ca
lled
Dol
lars
(mai
nly
toke
ns,v
arie
tyof
met
als)
,18
,966
312
19,2
780.
07%
1826
–195
6T
otal
U.S
.Non
gold
Com
mon
Coi
ns:P
enni
es(1
859-
),N
icke
ls(1
866-
),D
imes
(183
7-),
Qua
rter
s(1
838-
),1,
814,
858
2,21
5,25
74,
030,
115
14.3
4%H
alfD
olla
rs(1
839-
)It
alia
nC
oins
(pos
t-18
61un
ifica
tion)
5,21
15,
211
0.02
%F
renc
hC
oins
(pos
t-18
70)
10,9
2810
,928
0.04
%R
ussi
anIm
peri
alC
oins
(180
1–19
18)
70,8
2470
,824
0.25
%E
nglis
hIm
peri
alC
oins
(160
0–17
07)
3,31
93,
319
0.01
2%M
exic
anC
olon
ialC
oins
(160
1–18
23)a
6,52
66,
526
0.02
3%N
ewZe
alan
dC
oins
/Bul
lion
Coi
ns(p
ost-
1856
)3,
352
3,35
20.
012%
Chi
lean
Coi
ns,M
ainl
yG
old
and
Som
eSi
lver
Col
onia
lEra
999
999
0.00
4%R
epub
lic(1
817-
)2,
292
2,29
20.
008%
Tot
al3,
291
3,29
10.
012%
U.S
.Bul
lion
Coi
nsSi
lver
(1ou
nce)
5,76
8,88
997
7,72
86,
746,
617
24.0
1%Si
lver
(5ou
nce)
62,2
1523
,776
85,9
910.
31%
617
Rare Coin Grading
Gol
d1,
050,
628
372,
352
1,42
2,98
05.
06%
Plat
inum
141,
579
62,4
8720
4,06
60.
73%
Tot
al7,
023,
311
1,43
6,34
38,
459,
654
30.1
1%C
hine
sePa
nda
Coi
nsA
llB
ullio
n35
3,58
735
3,58
71.
26%
Hon
gK
ong
$1,0
00G
old
Bul
lion
871
871
0.00
3%C
anad
ian
Map
leL
eaf,
1979
-(a
llsi
zes)
Gol
dan
dSi
lver
Bul
lion
14,2
0414
,204
0.05
1%C
anad
ian
Map
leL
eaf(
18.7
%),
othe
r1
oz.,
1973
-Si
lver
Bul
lion
22,0
2822
,028
0.07
8%So
uth
Afr
ican
Kru
gger
and
Gol
dB
ullio
n5,
273
5,27
30.
02%
Aus
tral
ian
$200
Koa
laG
old
Bul
lion
1,04
91,
049
0.00
4%U
.S.M
edal
san
dA
mer
ican
Art
sM
edal
s8,
324
8,32
40.
03%
All
Oth
erC
oins
,Tok
ens,
and
Med
als
31.5
%T
otal
100.
0%
aM
any
Mex
ican
coin
sin
this
cate
gory
are
grad
edle
ssth
anM
S-60
.So
urce
:NG
Cco
ince
nsus
(ww
w.n
gcco
in.c
om/p
oplo
okup
/us-
coin
-cen
sus.a
spx)
.
618
Cato Journal
are by definition much more abundant. My email conversations withsome other firms and information posted on the Internet suggest thatthe industry has changed over the years. There is far more diversityin coin grading now than ever before, which is confirmed by the datafrom NTC in Table 8; NTC mainly deals with collectible coins butalso has a significant business in grading medals and tokens.
It seems plausible that very valuable coins only go to the best firmsfor grading since an incorrect grade would be so costly. In addition,the higher grading cost of the top firms is often miniscule relative tothe price of the coin, making the use of lower-quality firms less sen-sible, other things being equal. About 70 percent of the coins gradedby NTC contain silver, gold, or platinum, rather than copper or abase metal (Table 8). This fact likely reflects the new firm’s compar-ative advantage in grading rare or collectible coins with strong slabanti-counterfeiting measures.
Innovative Services Offered by Coin Grading Firms to MeetChanging Demand
Coin grading firms also offer special services. For example, someprovide medallion, medal, and token grading; imaging services;
TABLE 8Coin Grading Service Markets for NTC
(Percentage of Coins Graded by Category)
Rare Collectible Coins “Bullion” or Other Medals &Coins MS-60_ Proof Coins Coins Tokens
5% 70% 5% 10% 10%
SOURCE: emails received from Joe LaBarbera with NumisTrust CoinGrading Service on December 24 and 26, 2013, including data from opera-tions since the firm restarted on May 1, 2013. He adds: “The New NTC isdedicated to providing consistent coin grading according to the currentmarket standards with excellent turnaround time, at fair pricing levels withoutstanding customers service. Dealers and collectors will be able to distin-guish the ‘New NTC holder’ because of the new hologram that is exhibitedon the backside of our holder. NTC has also added secret security featuresto the holder to provide additional security and anti-counterfeiting. Ourconcern is that counterfeit slabs will undoubtedly plague the certified coinbusiness in the future. NTC has taken steps now to prevent this.”
619
Rare Coin Grading
ancient coin authentication; shipwreck certification; conservation(residue removal and surface protection) services; slabbing into over-size holders; and metallurgic analysis. Newcomer SEGS is challeng-ing the market share of PCGS and NGC by offering its upgraded slabfor a lower price and quicker turnaround time, although the recentProfessional Numismatists Guild industry survey indicates that deal-ers consider SEGS standards to be poor. Hence, SEGS will not becatching up to the bigger players anytime soon. Apparently, peopleare willing to pay more for widespread acceptance (higher reputa-tion) and perhaps the security associated with the longevity of lead-ing firms. Market-based regulation of quality seems to work well.
Another interesting fact about the grading industry has to do withthe apparent consumer ignorance regarding the quality of differentgrading services. Although many consumers are well apprised of coingrading services, others may not be so careful in their selection still.Accordingly, any encapsulation and grading may well be better thannone at all—especially for lower-valued coins, and in that case, thevery-low-cost firms fill an important niche (especially firms likeANACS, ICG, and perhaps NTC, SGS, and SEGS). This consumerdemand feature also allows easier entry for newcomers to theindustry.
This case study has primarily focused on the grading of rare coins,that is, coins with low mintage, few surviving specimens, or a veryhigh grade based on quality (condition). Nonetheless, as noted ear-lier, companies in the certification industry actually serve otherimportant and profitable markets, too, from which the lion’s share oftheir income is apparently derived. Probably more than one-half ofall coins slabbed could not rightly be considered “rare.” The gradingcompanies contacted were loath to give out sales information.
However, a few firms did provide data on the kind of coins theygrade. As noted in Table 7 and Table 8, changing consumer demandhas permitted NGC and NTC to profit by grading modern coins and“bullion coins” (i.e., those having only precious metal value). They alsograde collectible coins and some medals that do not necessarily carrysignificant value over the value of the precious metals they contain—if they contain any precious metal at all. Nowadays, many more mod-ern coins are slabbed and in many cases hardly carry enough value topay for the slabbing. In effect, the smaller volume of the mostspecialized and rigorous grading services for rare coins are being sub-sidized by more mundane, higher-volume ones. Also of interest is the
620
Cato Journal
dominance of U.S. coins. According to tables on the NGC website,about 75 percent of the millions of coins graded by NGC have beenU.S. coins. This 75 percent figure is echoed by NTC, too, whichfocuses far less on bullion coins and far more on medals and tokensthan NGC does.
Moreover, coin dealers have subjective preferences that causethem to prefer one service to another on a micro level. For example,they may prefer NGC for “tighter” grading of gold coins and PCGSfor “tighter” grading of silver dollars (Cobin 1997: 101–2). Firms spe-cialize in such nuances to meet consumer demand. Those firms thatdo not adapt may fall into disrepute. Poorer grading reputations gen-erally reflect conflicts of interest perceived by the market. Notably, agrading firm might have an affiliated business as a coin dealer, andthis nexus can naturally cause suspicion. Perceptions of inferior grad-ing techniques, such as assigning a different grade to the front andback of a coin, also tends to lower a firm’s reputation. Bad firms even-tually go out of business; the black sheep provider INS in 1994(Cobin 1997: 103) could not stay in the market for long once it hadattained its bad reputation.
Additionally, coins graded “early” (usually identified by the differ-ent shape of the slabs used when coin-grading services were justemerging) are considered to have been graded “tougher” and carry apremium. The market adjusts for this fact. Older graded coins maywell be “upgraded” after re-grading (Cobin 1997: 101–2). The priceof slabbing services is generally low (an expected result of competi-tion), especially when one considers the cost relative to higher-valuedcoins. Thus, onlookers can readily see how the industry dynamicallyassimilates information about firm quality, past products, and con-sumer or dealer tastes over time.
The market has spontaneously generated a firm that evaluates theoutput of top graders NGC and PCGS, too. Certified AcceptanceCorporation, founded in 1987 by John Albanese (co-founder ofPCGS and founder of NGC), affixes a “green tamper-evident holo-graphic sticker” when a coin is correctly graded and a “gold” one ifit is undergraded. Coins that “just make the grade” or overgradedcoins receive no sticker. Another important market innovation in thecoin grading industry is offering “reconsideration” or “crossover”services (Table 9). With this service, a firm promises not to breakopen the slab of the competing firm unless it can assure the submit-ter that the grade will be at least as high or higher. The cost of
621
Rare Coin Grading
upgrading one’s grading service need not be expensive (except per-haps for high-valued coins sent to PCGS), and the potential gainsfrom an improved grain are significant. Top firms are thus enabledto damage competitors and put distance between themselves andother firms.
Shipping and Insurance Costs
Shipping costs are reasonable, and depend on speed of delivery,size of order, insurance, and distance to destination. The greater thenumber of coins submitted, the lower the average shipping cost.Regular service turnaround times range from 10 to 15 days.Additional fees are charged for insurance coverage during shipping.
The United States Post Office will not insure coins being shippedbut it will accept and insure “numismatics and collectibles” (includ-ing coins in that category) with value proven by a third-party service.For example, a numismatic coin worth $200,000 can be shippedinsured by registered mail in the United States for $180 and, for coinsworth up to $100,000, shipped insured internationally anywhere for$55 ($46 to Canada and $52 to Europe).
The ANACS website lists a price of $79 to ship and insure a coinvalued at $100,000 (customers must call for a shipping and insurancequotation on higher-valued coins), and NTC charges $80 for a coinof the same value. Customers with accounts at private courier serv-ices like Federal Express and UPS can also obtain reasonably priced
TABLE 9Reconsideration (Crossover) Fees Charged by
Participating Coin Grading Services
Firm “Reconsideration” or “Crossover” Fee
PCGS Basic fee for chosen service _ 1% of value if coin upgrades.NGC “There is no additional fee for Crossover; only the grading
tier charges apply.” Only PCGS graded coins can besubmitted, except that sister-company NCS coins can bedone for $5.
ACCGS $10SEGS $22
Source: Company websites.
622
Cato Journal
insurance for the coins shipped, around $200 for a coin valued at$75,000.
There is company called ShipAndInsure6 mentioned on NGC’swebsite, which is affiliated with the North American CollectiblesAssociation, that specializes in facilitating coin shipments using majorcarriers in the United States and worldwide. Association membersare able to get discounts and, importantly, larger limits on the valueof coins that can be shipped. Some shippers for certain classes ofservice will not insure a coin for more than $75,000 or even as littleas $10,000. In some cases in the United States, a homeowner’s insur-ance policy might cover all or part of the value of a shipped coin.
Some of the major grading companies also provide insurance,such as ICG, which has base prices as low as $20 per coin, in theUnited States, to $75 internationally. SGS will insure five coins worthup to $4,999 each for an $18 fee. PCI has an insurance cost table onits website; the insurance cost for a $25,000 coin is $35. The cost ofcoin insurance has evidently dropped in the last two decades. In1994, PCI charged a fee of $115 for a $25,000 valued coin (Cobin1997: 104)—329 percent higher than current pricing—which was (atthe time) relatively expensive compared to other firms.
Effective Grading Services Alleviate MarketImperfections
Rare coins are uniquely differentiated goods. Differences and dis-crepancies between coins are not easily noticed. Typically, greatersupply and fungibility in a widely minted coin series means that acoin in that group is less likely to command a high price beyond itscommodity value as a metal. Even in low mintage issues, there areconsiderable differences in coin condition that warrant grading todifferentiate them. Until the late 1980s, coin grading was not a stan-dard process. Individual dealers would grade the coins. Those indi-viduals who did not have the same specialized knowledge as the coindealer were at a disadvantage when buying or selling rare coins.
For example, a dealer could say that a coin offered to him is anMS-65 when in fact it is an MS-66, which commands a higher price.(The visual difference between an MS-65 and an MS-66 is not dis-cernible to most people.) After buying the coin, packaging it and
6 The company website is https://shipandinsure.com.
623
Rare Coin Grading
offering it for sale as an MS-66 would be facile for the dealer.Because of the fineness of the coin, fungibility, and extensive supply,such quasi-fraud would be virtually undetectable. (The same coincould be seen by its former owner during a future visit and not bedetected.) A similar problem arises when the roles are reversed in thetransaction. The dynamic rare coin certification industry has evolvedto alleviate such inequity.
As we have seen, privately owned and competing grading firmshave spontaneously generated in the market, offering sufficientsalaries to attract noted industry experts to grade coins exclusively.The resulting grading and slabbing provides market participants withan objective and reliable means of evaluating rare coins. These inter-mediaries allow buyers and sellers to avoid the costs of irksome assaytesting, weighing, and examining for genuineness, rarity, or fineness.Accordingly, transactions (knowledge acquisition) costs associatedwith information gathering and verification are minimized. Not sur-prisingly, the cost of grading is also internalized into the price oftraded coin (i.e., an encased or slabbed graded coin often sells for aslightly higher price than if it is still “raw”). Markets have ampleincentives to provide information and that public benefit is oftenregarded as a public good. Notably, the influence of free-riding hasnot precluded the provision of this service.
Therefore, the market can be trusted to produce a reliable high-quality informational public good, and the quality of market provisionis automatically enforced since grading and certification services havean incentive to protect their reputations. As demonstrated in Table 3,firms with the best reputation for reliability (i.e., greysheet percent-age) also have the highest market share, and command the highestprices for services. Grading and certification services inadvertentlymitigate the free-rider problem. Of course, these firms did not evolvewith the express purpose of resolving a public goods problem, butrather to provide third-party assurances that are demanded by manyprivate shoppers and investors. Like the self-interest motive of AdamSmith’s baker that ended up “feeding” Paris, the economic goals ofrare coin graders has inadvertently led to social benefits.
Rare coin grading and certification firms have met consumerdemand, and thus created “public good” benefits for everyone whowants them. Yet rare coin owners and sellers are content to continueto purchase these services nonetheless, despite the fact that the infor-mation is nonrival in consumption. All who can partake of the good
624
Cato Journal
do so without lessening the amount to other people. Each coin isunique, but if rare coin owners or dealers display them for the pur-pose of sale then they cannot bar certain patrons. Consequently,information about the coins “publicly” provided by the market mightbe considered nonexcludable.7
Conclusion: A Market Alternative toGovernment Regulation
The preceding example of grading and certification services in therare coin industry has considerable ramifications for the grading ofreal property, military hardware, public transportation highway vehi-cles and aircraft, air and water quality, farmland and watershed eval-uation, food, electrical generation dams and devices, automobiles,pharmaceuticals, educational institutions, and many other goods andservices. In North America, South America, and Europe, grading andcertifying is often provided by the state or one of its municipal sub-divisions, although private inspectors in some cases (e.g., for build-ings) are occasionally hired by individuals, insurance companies, andutility companies. Planning boards and their inspectors provide grad-ing services, despite the fact that the market could provide effectivegrading services, as it does in other industries.
The ostensible purpose for government intervention into transac-tions for both real and personal property is multifarious, but it hasbeen primarily to alleviate imperfect information and to reduce neg-ative externalities. An assumption is made that the government willnot garner monopoly profits because it exists for the “public interest”and not to maximize profits. Moreover, the government is often pre-sumed to provide a dispassionate, objective, and reliable evaluationof quality—conjecture that has been called into question by manyeconomists.
Certainly, the cost of these government benefits is considerable;there is no free lunch. In other words, a uniform minimum standardof quality is expensive. But are transactions costs really lowered bygovernment regulation of the quality of goods, or have the costs just
7 However, other providers of information that might be considered public goods,such as library councils, building owners, and Internet services, can likewise bar“undesirable” persons from consumption. Hence, if informational services are con-sidered public goods, there must ultimately be exceptions to nonexcludability.Consequently, these services can hardly be considered public goods.
625
Rare Coin Grading
been shifted or internalized into the price of the improvements?Contrary to findings that price regulation improves quality(Anderson and Enomoto 1986: 87), other evidence suggests that gov-ernment regulation minimally impacts (Jordan 1972) or even debasesquality, not to mention increasing the associated transactions coststhat would have otherwise been avoided (Cobin 1997, Anderson1994, Lave 1992) and the shortcomings of government-providedinformational services (Magat and Viscusi 1992). The present studyof grading in the rare coin industry demonstrates, too, that marketshave provided high quality without government regulation (High1991), avoiding the pitfalls of regulation that have worriedresearchers (Hertog 2010: 46), such as bureaucratic inefficiency,public choice, and knowledge problems.
Important questions need to be answered. Would transactions(knowledge) costs be lower if the market were to provide an alterna-tive, competitive grading system? Are consumers merely beingforced to buy a very expensive insurance policy from the govern-ment? If the evidence from the rare coin industry provides a clue,then we may conclude that markets would provide more effectiveand efficient means of generating information when it certifies qual-ity. The government’s informational “insurance policy” is demon-strated to be too expensive and does not provide the quality ofcoverage that would be cheaply provided by the market.
Furthermore, it is not clear that people demand such a uniformdegree of certainty when buying goods, services, or real property.Why should everyone be compelled to pay for part of the same pub-lic good (i.e., quality information), which is an additional cost of reg-ulation? For instance, it is conceivable that if the cost of suchcertainty exceeded even a small percentage of the good or property’svalue, then some consumers would prefer to save the added expenseby assuming the associated risks themselves (i.e., self-insuring).
Markets are capable of developing effective and reliable means forgrading other goods and property that are analogous to grading serv-ices in the rare coin industry. The rare coin industry has sponta-neously developed an effective, inexpensive grading system. It was anunintended consequence of human action, which led to greater coor-dination and increased knowledge. Moreover, those individuals whoparticipate in trading rare or otherwise valuable coins are not dis-gruntled over the existence of grading firms. Will regulators arguewith this success? If so, are they, as Mises (1996: 850) asked, merely
626
Cato Journal
protecting favor brokering and rent seeking, and aiming at the per-petuation of their own supremacy? Surely, it makes no sense toblindly accept the preferences of a majority of unenlightened votersor a handful of ostensibly enlightened bureaucrats.
What would a world certified by private grading firms look like?One could imagine a potential situation where grading firms com-pete with one another. As long as each grading firm maintains highstandards—because of competition—it will be able to receive pre-mium revenues and preserve its reputation relative to other firmsand consumer costs will fall. Lower-quality services will be obliged toassuage consumers by charging lower prices, and will likely go out ofbusiness if they do not improve the quality of their service over time.In the information market, a reputation for accuracy and reliability isof paramount importance. One foul-up and a firm may be finished.
Furthermore, market-based grading and certification services canbe a higher-order “knowledge” good. While the knowledge problem(Hayek 1945, Holcombe 1995, Sowell 1996) can never fully be over-come, its severity may be alleviated by more and better information.Yet obtaining such information is costly. As Alchian (1977: 133)notes, “Those costs of becoming informed about what a good or serv-ice or rented good will do, raise transfer costs and also reward longeror greater searching activity by potential buyers or employers.”Therefore, information, like most things, is scarce and needs to beeconomized. In addition to economizing scarce information, gradingfirms must also adapt to changing conditions. “It is certainly true,”wrote Mises (1996: 852), “that the necessity of adjusting oneself againand again to changing conditions is onerous. But change is theessence of life.” Markets are flexible and dynamic enough to handlethat change.
Accordingly, because consumers are uneasy about their ignoranceand want to improve their market information, it follows that firmswill spontaneously develop (in the Hayekian sense) and specialize inproviding knowledge (e.g., grading or certification services) at thelowest cost. Far from being nugatory market institutions, the exis-tence of such firms indicates the further advancement of economicprosperity.
In the final analysis, reputation enhancement and knowledge pro-duction are indispensable elements of the market process. Hence,the key issue concerns whether government bureaucracies or themarket is the superior generator of such knowledge. What is clear
627
Rare Coin Grading
from the study of grading services in the rare coin industry is that themarket process has successfully made provision for setting standardsand regulating quality without any reliance on government. Market-based regulation is not only possible, it is likely, and it emerges with-out public policy to satisfy consumer demand efficiently.
ReferencesAlchian, A. A. (1977) “Why Money?” Journal of Money, Credit and
Banking 9 (1): 133–40.Alger, D., and Toman, M. (1990) “Market-based Regulation of
Natural Gas Pipelines.” Journal of Regulatory Economics 2 (3):263–80.
Allard, D. M., ed. (1990) Hobbyist Sourcebook. Detroit: GaleResearch.
Anderson, G. M. (1994) “Economic Theory of Regulation.” In P. J.Boettke (ed.) The Elgar Companion to Austrian Economics,294–99. Northampton, Mass.: Edward Elgar,
Anderson, R. K., and Enomoto, C. E. (1986) “Product Quality andPrice Regulation: A General Equilibrium Analysis.” Economica 53(29): 87–95.
Benson, B. (1989) “The Spontaneous Evolution of CommercialLaw.” Southern Economic Journal 55 (3): 644–61.
Blundell, J., and Robinson, C. (2000) Regulation without the State:The Debate Continues. London: Institute of Economic Affairs.
Buchanan, J. M. (1991) “From Private Preferences to PublicPhilosophy: The Development of Public Choice.” InConstitutional Economics. Cambridge, Mass.: Basil Blackwell.
Cheung, S. N. S. (1988) “The Fable of the Bees: An EconomicInvestigation.” In Cowen (1988: 279–304).
Coase, R. H. (1974) “The Lighthouse in Economics.” Journal of Lawand Economics 17 (2): 357–76.
Cobin, J. M. (1997) “Market-Regulatory Alternatives.” In BuildingRegulation, Market Alternatives, and Allodial Policy, 81–114.London: Avebury Press.
(2013a) “Does Fire Safety Regulation Work? Lessonsfrom Turin, Italy.” Economia dei Servizi 1: 29–56.
(2013b) “The Effectiveness of Delhi’s Fire SafetyRegulation amidst Poverty, Ignorance, Corruption and Non-compliance.” Economic Affairs 33 (3): 361–78.
628
Cato Journal
(2013c) “The Enterprise of Fire Safety Services inLagos, Nigeria.” Independent Review 17 (3): 379–414.
(2014) “Theory Review: Does Fire Safety RegulationWork? Lessons from Turin, Italy.” Planning Theory 13 (2):189–209.
Cook, B.; Cribb, J.; and Carradice, I. (1990) The Coin Atlas: TheWorld of Coinage from Its Origins to the Present Day. New York:Facts on File.
Cowen, T., ed. (1988) The Theory of Market Failure: A CriticalExamination. Fairfax, Va.: George Mason University Press/CatoInstitute book.
Davies, D. G. (1971) “The Efficiency of Public versus Private Firms:The Case of Australia’s Two Airlines.” Journal of Law andEconomics 14 (1): 149–65.
De Alessi, L., and Staaf, R. J. (1994) “What Does ReputationReally Assure? The Relationship of Trademarks toExpectations and Legal Remedies.” Economic Inquiry 32 (3):477–85.
De Jasay, A. (1989) Social Contract, Free Ride: A Study of the PublicGoods Problem. Oxford: Clarendon Press.
De Vany, A. S., and Saving, T. R. (1983) “The Economics of Quality.”Journal of Political Economy 91 (6): 979–1000.
Dobrow, L. (2014) “Fair Ball: In the Sports-memorabilia World,Legitimacy Is Everything—and the Authentication Business IsBooming.” American Way 47 (7): 40–43.
Foldvary, F. (1993) Public Goods and Private Communities: TheMarket Provision of Social Services. Brookfield, Vt.: EdwardElgar/Locke Institute.
Halperin, J. (1990) How to Grade U.S. Coins. Dallas: Ivy Press.Hayek, F. A. (1945) “The Use of Knowledge in Society.” American
Economic Review 35 (4): 519–30.Hertog, J. D. (2010) “Review of the Economic Theories of
Regulation.” Utrecht School of Economics, Working Papers10–18. Available at www.uu.nl/SiteCollectionDocuments/REBO/REBO_USE/REBO_USE_OZZ/10-18.pdf.
High, J. C., ed. (1991) Regulation: Economic Theory and History.Ann Arbor: University of Michigan Press.
High, J. C., and Ellig, J. (1988) “The Private Supply of Education:Some Historical Evidence.” In Cowen (1988: 361–82).
629
Rare Coin Grading
Holcombe, R. G. (1995) Public Policy and the Quality of Life: MarketIncentives versus Government Planning. Westport, Conn.:Greenwood Press.
Jordan, W. A. (1972) “Producer Protection, Prior Market Structureand the Effects of Government Regulation.” Journal of Law andEconomics 15 (1): 151–76.
Klein, D. B. (1997) Reputation: Studies in the Voluntary Elicita-tion of Good Conduct. Ann Arbor: University of Michigan Press.
Komhauser, L. A. (1983) “Reliance, Reputation, and Breach ofContract.” Journal Law and Economics 26 (3): 691–706.
Lave, L. B. (1992) “Risky Business: Thinking about the Benefits andCosts of Government Regulation.” The American Enterprise 3 (6):19–22.
Lindsay, C. M. (1976) “A Theory of Government Enterprise.”Journal of Political Economy 84 (5): 1061–77.
Loftus, P. (2012) “Rare Gold Coins Belong to Mint, Judge Decides.”Wall Street Journal (9 September).
Magat, J. A., and Viscusi, W. K. (1992) Informational Approaches toRegulation. Cambridge, Mass.: MIT Press.
Martin, J. P. (2008) “Coin Grading and Professional Third-PartyGrading Services.” American Numismatic Association CoinServices (online brochure). Available at www.anacs.com/PDFFiles/ANACS_Brochure.pdf.
Milburn, R. (2013) “Small Coins, Big Money.” Penta Daily (Barron’sBlogs) (29 July). Available at http://blogs.barrons.com/penta/2013/07/29/small-coins-big-money.
Mises, L. V. (1996) Human Action: A Treatise on Economics. 4threvised ed. Irvington-on-Hudson: Foundation for EconomicEducation.
Mixon, F. (1992) “Ronald Coase and the Lighthouse.” AustrianEconomics Newsletter 13 (2): 3–4.
Niskanen, W. A. (1971) Bureaucracy and RepresentativeGovernment. Chicago: Aldine-Atherton.
(1994) Bureaucracy and Public Economics.Cheltenham, UK: Edward Elgar.
O’Driscoll Jr., G. P., and Hoskins, L. (2006) “The Case for Market-Based Regulation.” Cato Journal 26 (3): 469–87.
Poole Jr., R. W., ed. (1982) Instead of Regulation. Lexington, Mass.:Lexington Books.
630
Cato Journal
(1988) “Leisure and Recreational Services.” In Cowen(1988: 327–39).
Ruddy, J. F. (1995) Photograde: A Photographic Grading Guide forUnited States Coins. Hollywood, Calif.: Bowers and RuddyGalleries.
Savas, E. S. (1982) Privatizing the Public Sector: How to ShrinkGovernment. Chatham, N.J.: Chatham House.
Schmidtz, D. (1991) The Limits of Government: An Essay on thePublic Goods Argument. San Francisco: Westview Press.
Shapiro, C. (1983) “Problems of High Quality Products as Returns toReputations.” Quarterly Journal Economics 98 (November):659–79.
Simmons, R. (2011) Beyond Politics: The Roots of GovernmentFailure. Oakland, Calif.: Independent Institute.
Sowell, T. (1996) Knowledge and Decisions. New York: Basic Books.Villagrán, J. M., and Vermeo, M. (2013) “Escondida supera en utili-
dades a Codelco y la estatal recortará $600 millones a plan deinversión este año.” Diario Financiero (1 June): 1.
Vousvounis, G. (2013) “Collectors Universe: A Low Risk, HighUncertainty Investment.” Moat Investing (3 December).Available at http://moatinvesting.com/author/gregoryvousvounis.
Wolinsky, A. (1983) “Prices as Signals of Product Quality.” Review ofEconomic Studies 50 (4): 647–58.
Yeoman, R. S. (1994) A Guidebook of United States Coins. 48th edi-tion (for 1995). Also known as “The Official ‘Red Book’ of UnitedStates Coins.” Racine, Wis.: Western Publishing. Later editionssince the 1990s have been edited by K. Bressett, including the68th edition (for 2015).