It's a commonly held belief that pricing an item at 99 cents as opposed to $1 is done for psychological rather than economic reasons. Consumer psychologists contend that there's more than a cent of difference between items priced at $4.99 and $5. In a similar vein, economists argue that when the price of an item is lowered even one cent, the potential to stimulate sales is often enough to recoup the loss on the lower price with higher volume.
Before the invention of the cash register, dishonest sales clerks could make a surprising amount of extra money each week by pocketing cash from sales rather than turning the cash over to the owner of the store. Here's how it worked: Let's say that a sales clerk in the late 1800s helped a wealthy customer pick out a new hat at Marshall Field's in Chicago. The hat sold for a whopping $2 (a lot of money in those days). When the customer purchased the hat, the sales clerk was responsible for handling the cash transaction.
With a sales price of $2, there was a good chance the customer would simply hand over two $1 bills to the sales clerk and exit the store. At this point, the clerk could easily pocket the money. However, when "off dollar" pricing strategies placed the product at $1.99, the clerk was forced to make change from the cash drawer, thereby dramatically increasing the chance that transaction would be accounted for. In those days, it was one more technique managers could use to keep employees honest.
Excerpted from Ben Franklin's 12 Rules of Management