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Network formation and the structure of the commercial World Wide Web (RV of 2006/04/MKT)

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We model the commercial World Wide Web (WWW) as a directed graph emerging as the equilibrium of a game in which utility maximizing Web sites purchase (advertising) in-links from one another, while also setting the price of these links. A key feature of our model is that we consider sites to be heterogeneous in terms of their "content", i.e., their inherent value to consumers. In a world where consumers "surf" on the WWW, sites' revenues/profits originate from two sources: (i) the sales of content (products) to consumers, and (ii) the sales of links (traffic) to other sites. We find that in equilibrium, higher content sites tend to purchase more advertising links mirroring the Dorfman-Steiner rule. Sites with higher content sell fewer advertising links and offer such links at higher prices. As such, there seems to be specialization across sites in terms of revenue models: high content sites tend to earns revenue from the sales of content while low content ones from the sales of traffic (advertising). In an extension, we also allow sites to establish (reference) out-links to one another beyond the sales of advertising links, and find that there is a general tendency to establish reference link to sites with higher content. Overall, there is a strong positive correlation between a site's content and the number of its in-links. We also explore network formation in the presence of search engines and find that the higher the proportion of people using these, the more sites have an incentive to specialize in certain "content areas". Our results have interesting practical implications for "search-engine optimization", the pricing of Internet advertising as well as the choice of Internet business models. They also shed light on why successful search engines (e.g., Google) can use simple heuristics based on in-links to rank sites with respect to their content.

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