Disney-Pixar Merger Analysis
Mujia He
The merger between Disney and Pixar is considered as one of the most successful and famous events throughout the merger
history. In 2006, Disney offered a valuation of $ 7.4 billion to purchase Pixar, eliminating a significant threat by turning its
potent competitor to partner. To review this successful merger, we need to understand how the merger benefited companies
while protecting consumers.
Disney and Pixar are both dominating companies in the animation industry, competing with DreamWorks, Nickelodeon, and
Warner Bros. Animation. Disney, founded in 1923, is considered as one of the most powerful animation studios, having
good reputation and significant position in producing animated films. Pixar, on the other hand, is a promising newly-born
studio that features on computer-animated films. In the animation industry, The cost of production is high; consumers’
choices favor long-existed and high-reputation studios; animation production technologies are possessed by only a few
firms. Thus, Few major studios dominate the whole market, formed an oligopoly, and competed by choosing quantity. On
the other hand, consumers have relatively elastic demand since films are not necessities and numerous movies provide them
with a wide range of choices. The bargain power of buyers and various film choices determine that oligopolists follow the
Cournot model other than Bertrand since studios can not compete by price.
The merger benefited both companies, combined their advantages, and allowed Disney and Pixar to specialize. On one hand,
RenderMan, owned by Pixar, can grant Disney cutting-edged 3D technology, making it possible for Disney to produce
animation of higher quality. Also, The merger can prevent potential competition, increase Disney’s profit and market share.
On the other hand, Pixar needed Disney as a competent partner that owned potent human resources, sufficient budget,
preeminent reputation, and loyal audiences. Merging enabled Pixar to fully concentrate on the film production with solid
access to funding that Disney could provide. Thus in January 2006, Disney purchased Pixar for $7.4 billion, offering each
share of Pixar’s stock at the price of 2.3 shares of its counterpart.
According to the Cournot competition model, the merger reduced n, which means that Disney had potential to increase the
quantity, set high prices, and thus earn more profit. The merger turned a potent competitor into a partner, which benefits
both firms because if the number of competitors is large, the quantity will decrease, meaning lower market share. From this
perspective, merger benefited the studios but was unfavorable to consumers due to loss in consumer surplus. However, in
the realistic situation, the harm to consumers diminished due to the particularity of film market. First, The cost of producing
a film is relatively high, making it difficult to increase quantity. The inability to significantly increase the movies quantity
reduce the possibility of pricing high. Thus, the adverse condition to consumers was weakened. In addition, if we assume
the quantity can increase regardless of the limitation on mass production, consumers were provided with a wider range of
choices as the quantity goes up. As an outcome, the price elasticity of demand would become more elastic, lowering the
feasibility of pricing unreasonably. Finally, the powerful alliance offered consumers with high-quality animations. The
improvement on film quality can also be considered as beneficial to consumers.
To sum up, The merger allows Disney to maintain and even increase market share while protecting consumers to some
degree. The tradeoff between animation studios and audiences makes the film market in an equilibrium, which makes the
merger between Disney and Pixar successful.
