Pacific Economic Review, 5: 1 (2000) pp. 77±87 BILATERAL AGREEMENTS IN A MULTIFIRM INDUSTRY: TECHNOLOGY TRANSFER AND HORIZONTAL MERGER SUGATA MARJIT  Centre for Studies in Social Sciences, India TARUN KABIRAJ Indian Statistical Institute, India ARIJIT MUKHERJEE Indian Statistical Institute, India Abstract. The paper studies the profitability of technology transfer and horizontal merger between two asymmetric firms in a multifirm Cournot oligopoly. If there is only one technologically advanced firm and one or many technologically backward firm(s), a profitable technology deal between two asymmetric firms exists if and only if the collaborating firms are ``close'' in terms of their initial technology levels. With more than one advanced firm such a technology deal is ``always'' profitable. Contrary to that, a profitable bilateral horizontal merger occurs if and only if the gap of technologies between the two partners is larger than a critical level. The paper also studies the relative profitability of these two bilateral arrangements. 1. INTRODUCTION The issues of technology transfer and merger have been discussed extensively in the industrial organization literature. In a technology transfer agreement a technologically advanced firm transfers its superior production knowledge to a technologically backward firm and charges an appropriate price for the technology. Under merger the constituent firms lose their identities and the merged firm is concerned with joint profit. Technology transfer directly generates efficiency in production and sometimes it increases concentration. Merger, on the other hand, directly increases concentration; it increases efficiency if it is associated with cost reduction. In this paper we concentrate on two possible bilateral agreements ± bilateral technology transfer and bilateral horizontal merger ± between two asymmetric firms in a multifirm industry producing homogeneous goods. Given any industrial structure, we address in particular the following questions: Is a bilateral deal on technology transfer or merger profitable from the viewpoint of the negotiating firms? How does this depend on the number of efficient and inefficient firms and=or on the asymmetry in production costs (or technolo- gies)? Given that the firms are allowed to be engaged in any such agreements, which alternative generates the largest profits? At this stage, we need to justify concentrating only on bilateral deals, although we are framing a multifirm structure. Theoretically, of course, it may be interesting to study the possibility of a multilateral deal or more than one # Blackwell Publishers Ltd 2000. 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.  Address for correspondence: Centre for Studies in Social Sciences, 10 Lake Terrace, Calcutta 700 029, India. The authors would like to thank an anonymous referee for helpful comments and suggestions. The usual disclaimer applies.