Tipping, Firm Strategy, and Industrial Organization
29 Pages Posted: 23 Aug 2007 Last revised: 9 Oct 2007
Date Written: 2006
Tipping is a phenomenon that has been studied for many years, but is receiving increased attention in recent years. The magnitude of tips is very large - in the US, for example, tips in the food industry alone amount to about $42 billion each year, and tips are given in many other establishments and countries, so annual worldwide tips are much higher than that. Millions of workers in the US alone derive most of their income from tips and tipping is prevalent in numerous countries and occupations. These are all good reasons to study tipping, but it is clear that tipping has created much interest also because it is puzzling from a theoretical perspective - why do people leave money voluntarily when service quality can no longer be changed?
The literature on tipping can be divided to two main areas. The first area can be termed understanding tipping behavior. This includes studies that try to understand why people tip, what affects their tipping behavior, why tipping is different across countries, etc. The second research area, which started to receive attention more recently, can be defined as tipping, firm strategy, and industrial organization. This part of the literature deals with the effect of tipping on firms and markets. For example, firms can sometimes choose between voluntary tipping and compulsory service charges - which one is better for the firm? How should the existence of tips affect optimal pricing by the firm? How should firms monitor workers and provide incentives to them when tipping exists? Why does tipping exist in some industries but not in others? Does tipping increase social welfare in industries in which it is the norm? All these questions belong to this second research area and demonstrate the close relationship of tipping to industrial organization and firm strategy. The purpose of this paper is to review and summarize the literature in this second area of research.
Keywords: tipping, firm strategy, business strategy, industrial organization, social norms, norms, restaurants, waiters, servers, the service industry, tips, gratuities, strategy
JEL Classification: Z13, L83, D11, D12, A12
Suggested Citation: Suggested Citation