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

41 Pages Posted: 20 Oct 2010 Last revised: 10 Aug 2014

Chrysanthos Dellarocas

Boston University, Questrom School of Business - Department of Information Systems

Zsolt Katona

University of California, Berkeley - Haas School of Business

William M. Rand

University of Maryland

Date Written: September 30, 2010

Abstract

A key property of the World Wide Web is the possibility for firms to place virtually costless links to third-party content as a substitute or complement to their own content. This ability to hyperlink has enabled new types of players, such as search engines and content aggregators, to successfully enter content ecosystems, attracting traffic and revenues by hosting links to the content of others. This, in turn, has sparked a heated controversy between content producers and aggregators regarding the legitimacy and social costs/benefits of uninhibited free linking. This work is the first to model the implications of interrelated and strategic hyper-linking and content investments. Our results provide a nuanced view of the much-touted “link economy,” highlighting both the beneficial consequences and the drawbacks of free hyperlinks for content producers and consumers. We show that content sites can reduce competition and improve profits by forming links to each other; in such networks one site makes high investments in content and other sites link to it. Interestingly, competitive dynamics often preclude the formation of link networks, even in settings where they would improve everyone’s profits. Furthermore, such networks improve economic efficiency only when all members have similar abilities to produce content; otherwise the less capable nodes can free-ride on the content of the more capable nodes, reducing profits for the capable nodes as well as the average content quality available to consumers. Within these networks, aggregators have both positive and negative effects. By making it easier for consumers to access good quality content they increase the appeal of the entire content ecosystem relative to the alternatives. To the extent that this increases the total traffic flowing into the content ecosystem, aggregators can help increase the profits of the highest quality content sites. At the same time, however, the market entry of aggregators takes away some of the revenue that would otherwise go to content sites. Finally, by placing links to only a subset of available content, aggregators further increase competitive pressure on content sites. Interestingly, this can increase the likelihood that such sites will then attempt to alleviate the competitive pressure by forming link networks.

Keywords: Hyperlinks, Media Economics, Content Networks, Content Aggregators, Strategic Network Formation

JEL Classification: D83, D85, L14, O34

Suggested Citation

Dellarocas, Chrysanthos and Katona, Zsolt and Rand, William M., Media, Aggregators and the Link Economy: Strategic Hyperlink Formation in Content Networks (September 30, 2010). NET Institute Working Paper No. 10-13; Boston U. School of Management Research Paper No. 2010-30; Robert H. Smith School Research Paper No. RHS 06-131. Available at SSRN: https://ssrn.com/abstract=1694370 or http://dx.doi.org/10.2139/ssrn.1694370

Chrysanthos N. Dellarocas (Contact Author)

Boston University, Questrom School of Business - Department of Information Systems ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Zsolt Katona

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

William M. Rand

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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