The answer to this needs to be broken into two parts.
The problem is that art fairs are absolutely crap way to look at work. Also they are horribly inefficient. You have to move artwork, temporarily, across the country or across the ocean...and then whatever isn't sold, ship it back. then the plane tickets, hotels, meals.....I can't imagine it could possibly be profitable unless one is selling work in the mid five to six figure range.
it seems like participating in fairs is something of a "loss leader"....just something you have to do in order to maintain a profile.
Ed...can you weigh in on this?
First comes a bit of a history lesson. Back in 2002 through more or less 2007, most younger galleries participating in one of the main satellite fairs in Miami (NADA, Pulse, Aqua, etc.) could make more money selling art in those 5 days than they would in 6-10 months back in their galleries. This is why the competition to get into those fairs was, for a while, so fierce. There was nothing "loss leader" about that aspect of participating in fairs.
Second, however, is a more complex explanation of most galleries' short- and longer-term goals with regards to art fairs. Most galleries would prefer to be in the premiere Miami art fair (Art Basel Miami Beach [ABMB]) because many of the world's top collectors visit that fair, and only that fair, during that week. Also it's a status symbol. It can help you meet more collectors, it greatly pleases your current collectors, and it can help you attract higher-profile artists.
But the competition for positions at that fair is, as they say, off the hook. Younger galleries need to pull out all the stops and submit a proposal that knocks the selection committees' socks off to get in. This can often lead to proposing booth concepts that will be difficult to sell, but will garner attention. (And it can't be emphasized enough, that it helps if the artist/s being proposed is/are having a high-profile year [e.g., biennials, museums, major commissions, etc.,] themselves.) In addition, galleries who didn't get accepted into ABMB, but know the fair directors and committee members often visit the satellite fairs, will sometimes present a booth designed to garner attention there (but, again, may be difficult to sell or even if it does sell, doesn't cover their costs), with the hopes of getting noticed and getting into Basel the following year.
In these cases, yes, you can call that a loss leader approach. But even then, the even longer-term goal is to secure your place in ABMB and eventually be able to make a lot of money there.
Of course, your position in ABMB will not remain secure if you let the quality of your booth slip, but if you look around you'll see the larger galleries tend to play it safer than the younger galleries in terms of how salable the art they bring is.
Finally, to get kind of theoretical about it, a gallery tends to want/hope for some combination of four main things at any fair :
1. To get their artists attention (with collectors, curators, or critics)
2. To establish relationships with new collectors
3. To make a profit
4. Barring that, to at least cover their costs
Any combination of these can make a fair a success, with item 3 being the exception. It alone can make the fair a success. The others tend to make me happier in groups.
The second question has a much shorter answer:
Bonus question For Edward Winkleman. If Rush Limbaugh walked in your gallery and wanted to purchase a work of art would you sell to him?