We study how downstream market characteristics affect upstream technology
market and innovation incentives. Main result is that the scope of technology
licenses chosen by patent holder falls as downstream product differentiation or
spillover effect gets lower. This means that although both lower differentiation
and higher spillover effect intensify downstream market competition, they exert
opposing effects on technology use and dissemination. Using this result we
show that optimal patent protection may have to be weaker as higher
differentiation intensifies competition.