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Tipping as a Strategic Investment in Service Quality: An Optimal-Control Analysis of Repeated Interactions in the Service Industry
Ofer H. Azar and Yossi Tobol
Southern Economic Journal
Vol. 75, No. 1 (Jul., 2008), pp. 246-260
Published by: Southern Economic Association
Stable URL: http://www.jstor.org/stable/20112038
Page Count: 15
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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.
Southern Economic Journal © 2008 Southern Economic Association