| 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 Òlink
economyÓ, 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 pure
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. |