Tipping as a strategic investment in service quality: An optimal-control analysis of repeated interactions in the service industry

Azar, Ofer H. and Tobol, Yossi (2006): Tipping as a strategic investment in service quality: An optimal-control analysis of repeated interactions in the service industry.

Abstract

We present an optimal-control model where tipping behavior creates 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 suggests 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.

• Item Type: MPRA Paper
• Institution: Ben-Gurion University of the Negev and Bar-Ilan University
• Language: English
• Keywords: Tipping; Service Industry; Behavioral Economics; Social Norms; Service Quality
• Subjects: Z - Other Special Topics > Z1 - Cultural Economics ; Economic Sociology ; Economic Anthropology > Z13 - Economic Sociology ; Economic Anthropology ; Social and Economic Stratification; L - Industrial Organization > L8 - Industry Studies: Services > L83 - Sports ; Gambling ; Restaurants ; Recreation ; Tourism; D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis

References

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