Network Formation and the Structure of the Commercial World Wide Web

We model the commercial World Wide Web as a directed graph that emerges as the equilibrium of a game in which utility maximizing websites purchase (advertising) in-links from each other while also setting the price of these links. In equilibrium, higher content sites tend to purchase more advertising links (mirroring 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, whereas low content ones earn revenue 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 links 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 them, 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 online advertising, and 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.