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In an interview with Big Think , Bruce Bueno de Mesquita gives us reason to believe more consumers should apply game theory to everyday purchasing. de Mesquita, professor pf politics at New York University and author of The Predictioneer's Game: Using the Logic of Brazen Self-Interest to See and Shape the Future , usually tackles such important issues as how the global political showdowns will play out. But here he shares his method for buying a car, and explaining how using a bit of logic allows us to bring about a positive economic outcome:

Small Business Trends has reprinted an article by Susan Reid --business coach and author of Discovering Your Inner Samurai: The Entrepreneurial Woman's Journey to Business Success- -in which she writes that now is the time to drop prices. This period of early but slow recovery is the right spot because "things are about to take off" for small businesses. She points to the film Mr. Mom, set in the recession of the early 1980s (Terri Garr and Michael Keaton fans: you'll have to read the full article--link below--to catch the relevance). And she outlines the right approach with these key pieces of advice: Create an esprit de corps. Don’t set yourself apart from your target market. Find a way to connect with them emotionally and show them you are all in the same boat. Example: We’ve all been through a lot during this recession and have gone through some tough times. Make sure you use strong wording when lowering your prices. Don’t be namby-pamby. Let folks know exactly what you are doing in bold, strong language. Example: We’re slashing the price of our services in half! Be entirely transparent and upfront about why you are lowing your prices. Don’t let there be a whiff of anything slightly off about your offer. Let people know exactly why you are lowering prices. Example: We know that many of you have wanted to use our services but found our prices were out of your budget. Be entirely clear in your call to action. Don’t apologize for asking them to take action. Tell them exactly what you want them to do and why. Example: Check us out again! We’ve dramatically lowered the price on most of our products. Tell folks when you will be going back to your regular prices. Don’t waffle around about when you will return to regular pricing. Tell them what you’ll be doing and when. Example: In six months, when the economic crisis is over, we’ll go back to our regular prices. Read Begin Your Economic Recovery. Lower Your Prices Now! here .

Here's an interesting case study for examining pricing models. There's no disputing Apple's success with its iTunes music store (unless, perhaps, you are an old-school record company executive). But Wharton School economists Ben Shiller and Joel Waldfogel have a new paper in which they argue both Apple and consumers would be better off if the the iTunes store shifted away from the "common practice of uniform pricing." If you are a subscriber to the National Bureau of Economic Research , you can read the paper here . If not, then here's an excerpt from The Economist magazine's article on the paper: In January 2008 the researchers presented nearly 500 undergraduate students at Wharton with clips of the 50 most popular songs on iTunes earlier that month. Having listened to each clip, the students were then asked to write down the most they would be willing to pay to download the song in question. Data on more than 23,000 song valuations resulted, allowing the professors to get a sense of the actual demand curves for popular songs. Similar data were also collected in January this year, though this time some older and less popular tracks were also included. The exercises showed that even a uniform price per song that maximised revenue among the students was quite high—$2.30 in 2008 and $1.46 in 2009. Wharton students may be particularly fond of music, but it is also possible that the market would sustain a higher uniform price than 99 cents. More important, knowing the uniform price that maximised revenue also allowed the authors to evaluate other ways to price online music. One alternative is song-specific pricing, much favoured by record companies. (Apple has already moved a bit in this direction with its multi-tier system.) But the research suggested that this would increase profits by a mere 3%. Part of the problem was that people who valued one song highly also tended to place a high value on others. This implies that person-specific, rather than song-specific, pricing would be more efficient. But sellers’ data are not refined enough to set different prices for different people. People may resent such pricing anyway, so it could harm sellers’ brands. Crude profiling—by race or sex, say—would be illegal. In any case, the authors found that basic demographic information did not tell them much about musical tastes. Read the full article here . (H/t Planet Money ).

The final Monday in August was a big day for mergers and acquisitions , and it looks like September is following suit. Xerox is buying Affiliated Computer Systems in a $6.4 billion deal. And Robert Profusek of Jones Day tells Bloomberg News that we should expect the M&A activity to keep up:

We humans seem to have a problem understanding value. Last week, Mark Thoma alerted us to a fascinating Scientific American article on how we may want to blame our ventromedial prefrontal cortex (VMPFC) for our inability to battle the "money illusion" that makes us think something is worth more than it really is. And today, economists Hugo Benítez-Silva , Selcuk Eren , Frank Heiland , and Sergi Jiménez-Martín write at Vox that we consistently overestimate the value of our houses by 5 to 10%. And, they write, "Overly optimistic expectations about the evolution of house prices may have planted the seed of the current mortgage crisis in the US." Homeowners, it seems, routinely overestimate the capital gains they expect from sale of their homes, so they report a skewed estimated value. But, the authors found, the problem is much greater if the homeowners purchased their homes during strong economic periods. There appears to be a strong inverse relationship between interest rates and the value estimation: Given the characteristics of our data on house purchases and house sales, we observe properties purchased as early as 1955 until 2000. This information enables us to explore whether the timing of the purchase and the market conditions at that time could have lasting effects on the accuracy of the individual in reporting the value of their homes. We document a strong correlation between the evolution of our accuracy estimates over time and the business cycle. In periods of high interest rates and declining incomes, the buyers are likely to have lower appreciation expectations due to the declining housing prices (see Figures 1 and 2 below), and end up assessing, on average, more accurately the value of their homes, and even in some cases underestimating it. Figure 1 . Interest rates and home sales in the US, 1960-2007 Figure 2 . Home sales and home prices in the US, 1968-2007 Read How well do individuals predict the selling price of their homes? here .