This paper discusses licensing agreements between duopolistic firms in a model of horizontal and vertical product differentiation. It is shown that a profitable technology transfer deal under a fee contract can be signed if and only if the quality differential is sufficiently larger than the technology differential. Technology transfer under a royalty contract, however, does not require such a condition. The paper also examines the possibility of trading a better technology for a superior quality. Finally, we show that the existence of a sufficiently high trading cost (in an open economy) can always make a fee transfer mutually profitable. The paper also provides a welfare analysis.