Media, Aggregators and the Link Economy:

Strategic Hyperlink Formation in Content

Networks
Chris Dellarocas Zsolt Katona William Rand
Boston University U. C. Berkeley University of Maryland
dell@bu.edu zskatona@haas.berkeley.edu wrand@umd.edu
 Hyperlinks have transformed the notion of content

From •  From collection to network

•  Traffic and revenue not only
function of content quality
but also of network position
•  In-links are essential for a
site to be discovered
•  Out-links allow sites to
generate traffic and revenue
to without investing in own
content
•  New players such as Google,
HuffingtonPost and other
aggregators are thriving
•  Traditional content producers
are struggling

2
 And this has caused a big controversy…

Change
copyright
laws?


3
 Central questions of interest to this work

•  How can content producers strategically combine

original content and links to maximize influence and
revenue?

•  How does the presence of content aggregators affect

the payoffs and content quality of content producers?

More broadly…
•  What are the micro and macro implications of
uninhibited unilateral linking across content nodes?

•  What would be the consequences of instituting

alternative linking policies? (e.g. permission required
by the target, payments attached to links)

4
 A simple model of the link economy:
Nodes

•  N nodes (media sites)

•  Only one topic
•  Sites can create content and/or link to third-
party content
•  Cost of content creation is kici2/2
ki = cost parameter (efficiency) of node i
ci = content quality of node i
•  Links are free and cannot be refused by target

5
 A simple model of the link economy:
Consumers

•  Consumers begin their news consumption process

from an anchor node
They consume original content contained in that node
and/or content directly pointed to by links present there
•  Different pieces of content on same topic are
substitutes
•  Utility from accessing a site that has own content
ci and links to sites j1,…,jl is

6
 A simple model of the link economy:
Anchor traffic

•  Consumers choose anchor nodes seeking to

maximize the utility zi they receive
•  Anchor traffic tAi is given by

where µ is the quality of an outside alternative

7
 Consumer behavior at anchor node

Revenue
User reads link source
Link source Link target
content and link description
but does not click cS 0

1-ρ
Link source Link target

User clicks right away 0 cT

and reads link target
content
8
 A simple model of the link economy:
Revenue

Number of Revenue per Number of link Revenue per link

Revenue = X X
Direct visitors direct visitor + visitors visitor

=
t iA X + X
ci

Advantages of linking Disadvantages of

linking
€ Link source Increased anchor €Decreased revenue
traffic per direct visitor

Link target Additional traffic Reduced anchor

through link visitors traffic

9
 Model: Key parameters

k cost (efficiency) of content production

µ quality of outside alternative
ρ probability of retaining anchor traffic
(i.e. probability of not clicking a link)

10
 Baseline models

•  Two identical nodes

•  Two unequal nodes
•  Two nodes + aggregator

11
 Baseline Scenario: Two identical nodes

When links are not possible…

•  Symmetric equilibrium
•  Competition forces both nodes to overproduce content,
which hurts their profits

When links are possible…

•  Sometimes no links are formed  above symmetric
equilibrium persists
•  When links are formed equilibrium is asymmetric 
–  If ρ not too high link target produces higher quality
–  Link target always makes higher profits
–  Link source sometimes makes higher profits
relative to symmetric equilibrium

12
 Two equal nodes:
Content and payoffs when ρ=0.5

cNL cT cS πNL πT πS

(a) Content (b) Payoffs

13
 Two equal nodes: Equilibrium regions

Asymmetric
link
equilibria
Both equilibria
sustainable

kµ

Symmetric No
no-links pure
equilibrium equilibrium

14 ρ
 Two unequal nodes

Nodes differ with respect to their content production cost

When links are not possible…

•  (As before) competition forces both nodes to overproduce
content, which hurts their profits
•  When nodes are very unequal, less efficient node cannot
stay on the market

When links are possible…

•  Less efficient node can always stay on the market by
linking to efficient node
•  When nodes are very unequal, this ends up hurting the
profits and reducing the content quality of the efficient
node

15
 Aggregators

•  Modeled as nodes with zero own content

•  Place a single link to the best content
•  Two main effects
1.  Increase attractiveness of entire content ecosystem
relative to outside alternative
k

∑z j
Total traffic flowing j=1
=
into content ecosystem k

∑z j +µ
j=1

2.  Appropriate part of the revenue that would otherwise

go to the link targets (thanks to the fraction ρ of
consumers who don’t click the link)
€
•  Net impact = sum of both effects
–  Can be positive or negative
16
 Impact of aggregators on traffic and revenue

•  Aggregators are beneficial iff µ is substantially

large compared to ρ
•  When µ=0 aggregators are never beneficial for
any ρ>0

17
 The competitive impact of aggregators

•  Aggregators typically place links to a subset of

the “best” available content
•  In the absence of links this intensifies competition
among sites further reducing profits but
benefiting consumers

•  However, intensified competition also implies that

the parameter region where the competing nodes
will be willing to form link equilibria expands

18
 Alternative link formation policies:
Links that can be refused by targets

The good…
•  Allows efficient sites to keep inefficient
competitors out of the market

The bad…
•  Reduces the parameter range where link
equilibria form

•  May lead to a hold up problem whereby the link

source is forced to overinvest in (unnecessary)
content to avoid having its link refused by the
target
19
 Two equal nodes: Equilibrium regions

Asymmetric
link
equilibria
Both equilibria
sustainable

kµ

Symmetric No
no-links pure
equilibrium equilibrium

20 ρ
 What happens when we allow links to be
refused

21
 Summary of initial findings:
Basic properties of link equilibria

•  Links can allow sites to avoid overproducing

redundant content
•  But competing sites are often reluctant to form
links even in settings where it would be mutually
beneficial
•  Furthermore links allow low quality nodes to
remain on the market, free-riding on high quality
nodes

22
 Summary of initial findings:
Aggregators

•  Aggregators improve the attractiveness of the

entire ecosystem but take a slice of profits away
from content producers
Their net impact depends on the balance between these
two forces
•  Aggregators further intensify the competition
among content nodes but this makes it more
plausible that nodes will form a link equilibrium

23
 Implications for the industry

•  Linking is a promising coordination tool that can

reduce redundant effort and improve social
outcomes in a hypercompetitive industry
•  Current “free for all” linking practices are
suboptimal
–  link equilibria don’t always form in cases where they
would increase profits and efficiency
–  free riding is not prevented
•  More efficient link formation policies are possible;
these would involve bilateral link formation
agreements and payments

24
 Ongoing work

•  Multidimensional content
•  Associating payments with links
•  Coalition strategies
•  How do these results scale in larger systems

•  Empirical analyses of the above!

25