To allow or not to allow tipping: tipping strategy choice for service platforms under competition

To provide consumers with a channel to interact directly with service retailers, some service platforms have allowed consumers to incentivize service retailers for better service via tipping. There are pros and cons of allowing and not allowing tipping in terms of service levels and costs, which can affect consumer utility and platform profitability. By developing a game-theoretic model, we analyze the tipping strategy choices of platforms under competition. We find that when the service ability of service retailers is high, platforms with service retailer pricing should allow tipping, whereas for at least one platform with platform pricing, they should allow it only when the commission rate is also high. Interestingly, if consumers are concerned about service levels in addition to service prices during tipping, for platforms with platform pricing, only one platform should allow tipping when the service ability is medium. However, when the service ability is low or when the sensitiveness of the service level to tips exceeds the threshold, neither platform should allow tipping, regardless of pricing models. Finally, an all-win outcome for service platforms, service retailers, and consumers may be achieved only when platforms adopt different pricing models.