Tipping as a Strategic Investment in Service Quality: An Optimal‐Control Analysis of Repeated Interactions in the Service Industry
Ofer Azar and
Yossi Tobol
Southern Economic Journal, 2008, vol. 75, issue 1, 246-260
Abstract:
We present an optimal‐control model in which tipping behavior creates a reputation that affects future service. Tipping and reputation can evolve in four path prototypes: converging to an interior equilibrium, converging to minimum tips and reputation, and two prototypes that start differently but end with tips and reputation increasing indefinitely. Analyzing the interior equilibrium indicates that when reputation erodes more quickly (capturing lower patronage frequency), equilibrium reputation is lower. Interestingly, however, tips may be higher. Increasing the minimal tip raises tips by the same increase and does not change reputation. A more patient customer leaves higher tips and reaches a higher reputation.
Date: 2008
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https://doi.org/10.1002/j.2325-8012.2008.tb00902.x
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Working Paper: Tipping as a strategic investment in service quality: An optimal-control analysis of repeated interactions in the service industry (2007) 
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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:75:y:2008:i:1:p:246-260
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