Media, Aggregators and the Link Economy: Strategic Hyperlink Formationin Content Networks

A key property of the World Wide Web is the possibility for firms toplace virtually costless links to third-party content as a substitute orcomplement to their own content. This ability to hyperlink has enablednew types of players, such as search engines and content aggregators, tosuccessfully enter content ecosystems, attracting traffic and revenuesby hosting links to the content of others. This, in turn, has sparked aheated controversy between content producers and aggregators regardingthe legitimacy and social costs/benefits of uninhibited free linking.This work is the first to model the implications of interrelated andstrategic hyper-linking and content investments. Our results provide anuanced view of the much-touted 'link economy', highlighting both thebeneficial consequences and the drawbacks of free hyperlinks for contentproducers and consumers. We show that content sites can reducecompetition and improve profits by forming links to each other; in suchnetworks one site makes high investments in content and other sites linkto it. Interestingly, competitive dynamics often preclude the formationof link networks, even in settings where they would improve everyone'sprofits. Furthermore, such networks improve economic efficiency onlywhen all members have similar abilities to produce content; otherwisethe less capable nodes can free-ride on the content of the more capablenodes, reducing profits for the capable nodes as well as the averagecontent quality available to consumers. Within these networks,aggregators have both positive and negative effects. By making it easierfor consumers to access good quality content they increase the appeal ofthe entire content ecosystem relative to the alternatives. To the extentthat this increases the total traffic flowing into the contentecosystem, aggregators can help increase the profits of the highestquality content sites. At the same time, however, the market entry ofaggregators takes away some of the revenue that would otherwise go tocontent sites. Finally, by placing links to only a subset of availablecontent, aggregators further increase competitive pressure on contentsites. Interestingly, this can increase the likelihood that such siteswill then attempt to alleviate the competitive pressure by forming link networks.