Network formation and the structure of the commercial world wide web. Marketing Science forthcoming

We model the commercial World Wide Web as a directed graph emerging as the equilibrium of a game in which utility maximizing Web sites purchase (adver-tising) in-links from each other, while also setting the price of these links. In equilibrium, higher content sites tend to purchase more advertising links (mirror-ing the Dorfman-Steiner rule) while selling less advertising links themselves. As such, there seems to be specialization across sites in revenue models: high content sites tend to earn 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 each other and find that there is a general tendency to establish reference link to sites with higher content. Finally, we 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 “con-tent areas”. Our results have interesting practical implications for ‘search-engine optimization’, the pricing of online advertising as well as the choice of Internet business models. They also shed light on why Google can use the Web’s link structure to rank sites by content