Hi Sumedh,
If it is not in its cache, it will not drop the traffic; instead it will forward it to the gateway and hence once reply froom Gateway comes; it will server the client
Regarding your question:
In practice, do people use web proxy as a hardware or a software ?
It depends on your budget and requirements... Hardware proxies are expensive, but at same time can server a hugh client base. Wherelse, software poxies are inexpensives, but can server fair amount of clients...
Regards,
Smitesh
PS: Please rate if helpful....