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

Ofer H. Azar, Yossi Tobol

Research output: Contribution to journalArticlepeer-review

15 Scopus citations

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.

Original languageEnglish
Pages (from-to)246-260
Number of pages15
JournalSouthern Economic Journal
Volume75
Issue number1
StatePublished - 1 Jul 2008

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